Guest Post: Elements of True Capitalism

April 24, 2012

Aziz Economics, Guest Post, Inflation , , , , , 24 Comments

Submitted by Tom Pizzo of AltMediaPost

Two necessary elements of a robust truly capitalistic system are economic growth through savings and participatory vested interest in one’s investments. These hallmarks are becoming increasingly scarce in a world of globalization and fiat money.

Investment through savings becomes increasingly difficult in a real negative interest environment. You simply cannot build up savings for an extended period of time without incurring a substantial loss. This makes it very challenging for one to save needed capital to invest in future ventures.

The fact remains economic growth must come from capital, and if saving becomes impossible or incredibly risky, the option of least resistance becomes borrowing. In other words growth through debt. This is precisely the type of growth our current monetary policy encourages, or rather demands. The problem is that it’s not sustainable. The model of growth through debt will continue to widen the gap between the wealthiest and poorest of our society, creating unheard of wealth in the hands of those with the power to create money, and perpetual debt for those reliant on borrowing to gain capital. The policy of the status quo is to punish savers and “reward” the indebted. It’s nothing short of a debtor’s serfdom.

The second major problem facing true capitalism is the corporation. The corporation at its core serves no other purpose than to remove personal liability, and in fact true personhood from the provider of goods and services. This enabler creates an environment for careless social contracts. The modern corporate world separates the investor from participatory involvement in his investment. It also separates the manager of the goods and services from direct financial consequence. If I invest capital in GE I have virtually no say in GE’s actions. I’m really not part of the business, my personal time, talent and sweat is irrelevant. Likewise the CEO may give himself large bonuses even if profits are down, and if things get really bad he may get bailed out or jump ship. This decoupling of the human element from commerce and business contracts facilitates a climate of irresponsibility, greed and general reckless behavior. With a personal involvement in one’s investments, more care is given to the proper use of funds. Reputations and liability move markets towards quality and maintain tempered prices.

True capitalism that creates a society of relative egalitarianism — where one is rewarded for his labors in proportion to his time and talent — must include a non-elastic commodity-based currency. A stable medium of exchange encourages savings, enabling growth without debt. This economy will naturally be localized, made of artisans, craftsmen and farmers. Land ownership and the right to manufacture goods and provide services will exist within the context of personal responsibility, quality and reputation.

If not, the money changers and the corporations that grow up around them will soon monopolize markets, leading to crony capitalism, in turn giving birth to fascism. Or the economic gap eventually leads towards a two class system, the political-corporate class and the masses. Often revolution ensues, but almost never resulting in desirable consequences.

Bernanke vs Greenspan?

March 23, 2012

Aziz Economic History, Economics, Fixed Income, Guest Post, Wall Street , , , , , , , , , , , , , , , 18 Comments

Submitted by Andrew Fruth of AcceptanceTake

Bernanke and Greenspan appear to have differing opinions on whether the Fed will monetize the debt.

Bernanke, on behalf of the Federal Reserve, said in 2009 at a House Financial Services Committee that “we’re not going to monetize the debt.“

Greenspan, meanwhile, on Meet the Press in 2011 that “there is zero probability of default“ because the U.S. can always print more money.

But they can’t both be true…

There is only 0% probability of formal default if the Fed monetizes the debt. If they refuse, and creditors refuse to buy bonds when current bonds rollover, then the U.S. would default. But Ben said the Fed will never monetize the debt back on June 3, 2009. That’s curious, because in November 2010 in what has been termed “QE2″ the Fed announced it would buy $600 billion in long-term Treasuries and buy an additional $250-$300 of Treasuries in which the $250-$300 billion was from previous investments.

Is that monetization? I would say yes, but it’s sort of tricky to define. For example, when the Fed conducts its open market operations it buys Treasuries to influence interest rates which has been going on for a long time — way before the current U.S. debt crisis.

So then what determines whether the Fed has conducted this egregious form of Treasury buying we call “monetization of the debt?”

The only two factors that can possibly differentiate monetization from open market operations is 1) the size of the purchase and 2) the intent behind the purchase.

This is how the size of Treasury purchases have changed since 2009:

Since new data has come out, the whole year of 2011 monetary authority purchases is $642 billion – not quite as high as in the graph, but still very high.

Clearly you can see the difference in the size of the purchases even though determining what size is considered monetization is rather arbitrary.

Then there’s the intent behind the purchase. That’s what I think Bernanke is talking about when he says he will not monetize the debt. In Bernanke’s mind the intent (at least the public lip service intent) is to avoid deflation and to boost the economy – not to bail the United States out of its debt crisis by printing money. Bernanke still contends that he has an exit policy and that he will wind down the monetary base when the time is appropriate.

So In Bernanke’s mind, he may not consider buying Treasuries — even at QE2 levels — “monetizing the debt.”

The most likely stealth monetization tactics Bernanke can use — while still keeping a straight face — while saying he will not monetize the debt, will be an extreme difference between the Fed Funds Rate and the theoretical rate it would be without money printing, and loosening loan requirements/adopting policies that will get the banks to multiply out their massive amounts of excess reserves.

If, for example, the natural Fed Funds rate — the rate without Fed intervention — is 19% and the Fed is keeping the rate at 0%, then the amount of Treasuries the Fed would have to buy to keep that rate down would be huge — yet Bernanke could say he’s just conducting normal open market operations.

On the other hand, if the banks create money out of nothing via the fractional reserve lending system and a certain percentage of that new money goes into Treasuries, Bernanke can just say there is strong private demand for Treasuries even if his policies were the reason behind excessive credit growth that allowed for the increased purchase of Treasuries.

Maybe Bernanke means he will not monetize a particular part of the debt that was being referred to in the video. Again, though, he could simply hide it under an open market operations 0% policy or encourage the banking system to expand the money supply.

Whatever the case, if you ever hear Bernanke say “the Federal Reserve will not monetize the debt” again, feel free to ignore him. When he says that, it doesn’t necessarily mean he won’t buy a large quantity of Treasuries with new money created out of nothing.

Remember, Greenspan says there’s “zero probability of default” because the U.S. can always print more money. Does Greenspan know something here? There’s only zero probability if the Fed commits to monetizing the debt as needed. If Greenspan knows something there will be monetization of the debt, even if Bernanke wants to call it something else.

Obama’s Fiscal Projections: A Doorway to a New Dimension of Reality

March 6, 2012

Aziz Economics, Guest Post, Politics , , , , , , , , , , 16 Comments

Submitted by Andrew Fruth of AcceptanceTake

Get ready to travel to a new dimension of sound, sight, and mind because President Obama has proposed to spend less on discretionary spending in 2022 than in 2011 in real and nominal terms.  That means he expects to spend fewer dollars in 2022, even after being debased by inflation, on discretionary functions than he did in 2011.  These projections come from a President that increased the entire U.S. debt by over 45% in a matter of 4 years.  We may have a credibility problem:

A closer look at the 2013 budget shows that Obama, in inflation and population adjusted dollars, wants to decrease discretionary spending from $1261 billion dollars in 2013 to $982 billion in 2022 for a decrease of 22.1%!  So, for the exception of Social Security, Medicare, Medicaid, other mandatory programs, interest, TARP, and a very small amount for “adjustments for disaster costs,” Obama plans to cut spending by 22.1% in adjusted dollars. Do we have any believers out there?:

But it doesn’t stop there.  Look at the interest rates the government expects to pay on its public debt.  The net interest row does not include intergovernmental debt.  All years are estimates except for 2011:

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
2.27% 1.94% 1.96% 2.30% 2.75% 3.22% 3.60% 3.85% 4.04% 4.18% 4.27% 4.36%

Public debt is set nearly to double from 2011 to 2022 and increase by $9.358 trillion.  Yet, by 2022, the government expects to pay interest rates on the public debt that are less than they paid on the total U.S. debt in the 1990s.

You may notice a slight difference between the interest rate in the table above and the interest rate shown in 2011 on the chart below.  Unlike the table above, the chart below measures average interest rates on the federal debt outstanding, so it includes intergovernmental debt interest.  The interest rates on the intergovernmental debt brought the average up from the table above to the chart below.

The differences, however, are slight.  The 1990s still had significantly higher interest rates in the 1990s than Obama projects, even for 2022:

You might be thinking that the government plans on the Federal Reserve buying up Treasuries to keep Treasury rates low.  Well, maybe, but the government only projects the “GDP chained price index” to range from 1.6%-2.1% from 2011 to 2022.  Needless to say, unless banks, as a whole, are deleveraging throughout the whole period, the Federal Reserve’s intervention in the Treasury market would create more than 2.1% price increases.

But wait, that can’t be because if the banks are deleveraging, then it’s really unlikely the economy is going to be growing as strong as Obama projects.  From 2012 through 2018, Obama projects the economy will grow between 2.7%-4.1% YOY in real terms.  Then the real growth rate drops off to 2.7%-2.5% from 2019-2022.  For comparison’s sake, the economy grew in the 2%-4% range from 2003-2006 during the boom times.

So, then, where is the $9.358 (minus whatever amount has been borrowed so far in fiscal year 2012) trillion at 1.94%-4.36% going to come from if not the Federal Reserve?  Pick you choice: a) the free market in the U.S. b) China c) Japan d) not going to happen.  I would provide an answer key for this question, but I don’t want to insult your intelligence.

So, if the government does plan on borrowing this much, assuming it can get it from somewhere other than the Fed, what happens if interest rate levels rise to rates similar to those found in the 1990s and 1980s?  Well, fortunately, in my book The Debtor’s Ultimatum: Defy, Debase, or Default I’ve done the research.  By the way, the following chart doesn’t even include the interest on the additional interest that would develop over this time from higher interest rates.

Here’s the Hypothetical Average Interest Rate Paid on the Public Debt Alone:

Government Numbers for both the chart above and below are sourced from the Midsession Review 2012, so the data are a little bit different from the data mentioned previously that is from the 2013 budget.

Here’s the Net Interest on Public Debt Alone in Billions of $:

Yeah, and there’s even more.  The government receipts projections are incredibly optimistic.  Part of that optimism is due to projected increase in economic growth and part of it is due to Obama’s proposal to let the Bush tax cuts finally expire.  We’ll see if either of those possibilities comes to pass.  I have my doubts about both.

Rather than pontificate, I’ll let you look at the 2013 budget data yourself.  The following are federal receipts, in trillions $.  2012-2017 are estimates:

2003 2004 2005 2006 2007 2008 2009 2010
1.78 1.88 2.15 2.41 2.57 2.52 2.10 2.16

2011 2012 2013 2014 2015 2016 2017
2.30 2.47 2.90 3.22 3.45 3.68 3.92

Did you notice that crazy jump from 2012-2013?  The government is expecting some pretty big economic growth.  We know those increases in receipts are not due to inflation, because the government expects hardly any at all.

Funny, in the 2012 budget, the government had the following data with only 2010 being a non-estimate:

2010 2011 2012 2013 2014 2015 2016
2.16 2.17 2.63 3.00 3.33 3.58 3.82

Notice the big jump from 2011 to 2012 they projected and compare it to the jump from 2011-2012 in the 2013 budget table.  They’re really counting on that surge of receipts, and if they’re off by a year, they’ll just delay the surge another year or so.

Take a look at the 2011 budget.  Only 2009 is a non-estimate year:

2009 2010 2011 2012 2013 2014 2015
2.10 2.17 2.57 2.93 3.19 3.46 3.63

Yep, once again, the projected jump from 2010-2011 was far less than actually occurred.

The President’s budget assumes no increase in nominal dollar spending from 2011-2022, interest rates to stay in the 2%-4% range despite needing to borrow around $9 trillion over the next decade, the Fed to not be a major player in buying that debt, because inflation numbers are low, and expects revenues to get a sudden boost, even after being wrong about his revenue predictions over and over again.  And to top it all off, all of these predictions come from a President who has increased the total U.S. debt by over 45% in his first term of office.  Oh, yes we can’t!

The Case Against America

December 16, 2011

Aziz Current Affairs, Guest Post, Politics , , , , , , , , , , , 24 Comments

In the interest of balance, I think it is apposite to lead off this post with the case for America:

#1 America can print as many dollars as she likes:

#2 America has copious nuclear missiles:

Now, the case against America.

From the Economic Collapse Blog:

The following are 50 economic numbers from 2011 that are almost too crazy to believe….

#1 A staggering 48 percent of all Americans are either considered to be “low income” or are living in poverty.

#2 Approximately 57 percent of all children in the United States are living in homes that are either considered to be “low income” or impoverished.

#3 If the number of Americans that “wanted jobs” was the same today as it was back in 2007, the “official” unemployment rate put out by the U.S. government would be up to 11 percent.

#4 The average amount of time that a worker stays unemployed in the United States is now over 40 weeks.

#5 One recent survey found that 77 percent of all U.S. small businesses do not plan to hire any more workers.

#6 There are fewer payroll jobs in the United States today than there were back in 2000 even though we have added 30 million extra people to the population since then.

#7 Since December 2007, median household income in the United States has declined by a total of 6.8% once you account for inflation.

#8 According to the Bureau of Labor Statistics, 16.6 million Americans were self-employed back in December 2006.  Today, that number has shrunk to 14.5 million.

#9 A Gallup poll from earlier this year found that approximately one out of every five Americans that do have a job consider themselves to be underemployed.

#10 According to author Paul Osterman, about 20 percent of all U.S. adults are currently working jobs that pay poverty-level wages.

#11 Back in 1980, less than 30% of all jobs in the United States were low income jobs.  Today, more than 40% of all jobs in the United States are low income jobs.

#12 Back in 1969, 95 percent of all men between the ages of 25 and 54 had a job.  In July, only 81.2 percent of men in that age group had a job.

#13 One recent survey found that one out of every three Americans would not be able to make a mortgage or rent payment next month if they suddenly lost their current job.

#14 The Federal Reserve recently announced that the total net worth of U.S. households declined by 4.1 percent in the 3rd quarter of 2011 alone.

#15 According to a recent study conducted by the BlackRock Investment Institute, the ratio of household debt to personal income in the United States is now154 percent.

#16 As the economy has slowed down, so has the number of marriages.  According to a Pew Research Center analysis, only 51 percent of all Americans that are at least 18 years old are currently married.  Back in 1960, 72 percent of all U.S. adults were married.

#17 The U.S. Postal Service has lost more than 5 billion dollars over the past year.

#18 In Stockton, California home prices have declined 64 percent from where they were at when the housing market peaked.

#19 Nevada has had the highest foreclosure rate in the nation for 59 months in a row.

#20 If you can believe it, the median price of a home in Detroit is now just $6000.

#21 According to the U.S. Census Bureau, 18 percent of all homes in the state of Florida are sitting vacant.  That figure is 63 percent larger than it was just ten years ago.

#22 New home construction in the United States is on pace to set a brand new all-time record low in 2011.

#23 As I have written about previously, 19 percent of all American men between the ages of 25 and 34 are now living with their parents.

#24 Electricity bills in the United States have risen faster than the overall rate of inflation for five years in a row.

#25 According to the Bureau of Economic Analysis, health care costs accounted for just 9.5% of all personal consumption back in 1980.  Today they account for approximately 16.3%.

#26 One study found that approximately 41 percent of all working age Americans either have medical bill problems or are currently paying off medical debt.

#27 If you can believe it, one out of every seven Americans has at least 10 credit cards.

#28 The United States spends about 4 dollars on goods and services from China for every one dollar that China spends on goods and services from the United States.

#29 It is being projected that the U.S. trade deficit for 2011 will be 558.2 billion dollars.

#30 The retirement crisis in the United States just continues to get worse.  According to the Employee Benefit Research Institute, 46 percent of all American workers have less than $10,000 saved for retirement, and 29 percent of all American workers have less than $1,000 saved for retirement.

#31 Today, one out of every six elderly Americans lives below the federal poverty line.

#32 According to a study that was just released, CEO pay at America’s biggest companies rose by 36.5% in just one recent 12 month period.

#33 Today, the “too big to fail” banks are larger than ever.  The total assets of the six largest U.S. banks increased by 39 percent between September 30, 2006 and September 30, 2011.

#34 The six heirs of Wal-Mart founder Sam Walton have a net worth that is roughly equal to the bottom 30 percent of all Americans combined.

#35 According to an analysis of Census Bureau data done by the Pew Research Center, the median net worth for households led by someone 65 years of age or older is 47 times greater than the median net worth for households led by someone under the age of 35.

#36 If you can believe it, 37 percent of all U.S. households that are led by someone under the age of 35 have a net worth of zero or less than zero.

#37 A higher percentage of Americans is living in extreme poverty (6.7%) than has ever been measured before.

#38 Child homelessness in the United States is now 33 percent higher than it was back in 2007.

#39 Since 2007, the number of children living in poverty in the state of California has increased by 30 percent.

#40 Sadly, child poverty is absolutely exploding all over America.  According to the National Center for Children in Poverty, 36.4% of all children that live in Philadelphia are living in poverty, 40.1% of all children that live in Atlanta are living in poverty, 52.6% of all children that live in Cleveland are living in poverty and 53.6% of all children that live in Detroit are living in poverty.

#41 Today, one out of every seven Americans is on food stamps and one out of every four American children is on food stamps.

#42 In 1980, government transfer payments accounted for just 11.7% of all income.  Today, government transfer payments account for more than 18 percentof all income.

#43 A staggering 48.5% of all Americans live in a household that receives some form of government benefits.  Back in 1983, that number was below 30 percent.

#44 Right now, spending by the federal government accounts for about 24 percent of GDP.  Back in 2001, it accounted for just 18 percent.

#45 For fiscal year 2011, the U.S. federal government had a budget deficit of nearly 1.3 trillion dollars.  That was the third year in a row that our budget deficit has topped one trillion dollars.

#46 If Bill Gates gave every single penny of his fortune to the U.S. government, it would only cover the U.S. budget deficit for about 15 days.

#47 Amazingly, the U.S. government has now accumulated a total debt of 15 trillion dollars.  When Barack Obama first took office the national debt was just 10.6 trillion dollars.

#48 If the federal government began right at this moment to repay the U.S. national debt at a rate of one dollar per second, it would take over 440,000 years to pay off the national debt.

#49 The U.S. national debt has been increasing by an average of more than 4 billion dollars per day since the beginning of the Obama administration.

#50 During the Obama administration, the U.S. government has accumulated more debt than it did from the time that George Washington took office to the time that Bill Clinton took office.

Guest Post: Devaluation, The Ultimate Taxation Without Representation

August 22, 2011

Aziz Guest Post , , , , , 2 Comments

Today’s guest post comes from our friends at Market Overflow:

The 1776 revolution in this country was not so much against any form of taxation but rather against taxation without representation. Western leaders long ago learned that the best slave is the one who thinks he is free. Let the mock elections continue with candidates who are fronted to a mostly ignorant society dumbed down by bread and circuses, well more like fast food and Jersey Shore. Marginalize any candidate who would bring about any actual change and disrupt the good old boys club. The second way to keep a society in slavery while maintaining the façade of freedom, is to devalue a currency while constantly touting low tax rates. This is precisely the tyranny I hope to discuss in this article. More

Paul B. Farrell: “Tax the Rich, or Riots in 2012″

August 16, 2011

Aziz Guest Post , , , , , , , 7 Comments

I have long suggested that it is possible to reverse America’s debt woes through either cutting spending on wars and bailouts, or raising taxes on the super rich, or both. Some, like Congressman Ron Paul favour the cuts route. Today, Paul B. Farrell, one of my favourite columnists on the entire internet, presents a compelling argument for the taxation route:

SAN LUIS OBISPO, Calif. (MarketWatch) — What a year. Rage in London, Egypt, Athens, Damascus. All real. Just a metaphor in the new “Planet of the Apes” film? No, much more. Warning: More rage is dead ahead. Across our planet a new generation is filled with rage. High unemployment. Raging inflation. Dreams lost. Hope gone. While the super -rich get richer and richer.

Listen to that hissing: The fuse is rapidly burning, warning us. Wake up before the rage explodes in your face. This firestorm is endangering America’s future. From forces outside, yes. But far more deadly, from deep within our collective psyche. We have lost our moral compass. We are self-destructing.

More

Follow

Get every new post delivered to your Inbox.

Join 1,223 other followers