GDP is down, consumer prices are up, unemployment is moving sideways, and the dollar is falling. At the low end of the economic ladder, inflation is rising faster than employment and wages. At the high end, home prices are still in free fall. It won’t be long before people who bought multi-million dollar foreclosures are now themselves in foreclosure.
Who could have seen this coming? Well, I did . . . more than two years ago.
But at least the market is up, right? Wrong. It’s up only if you price the market in dollars. But the dollar is down. In Euros the Dow Jones gained barely two percent in a year–kind of like the growth in GDP. (Gee, I wonder if there’s a connection.) In Swiss Francs and Australian Dollars–two currencies that have purposefully tried to stay strong over the last couple years–the Dow Jones actually lost money.
If you’ll recall, a couple days ago we looked at commodity prices in various currencies and discovered that, while in the US prices are dramatically up for oil, wheat, and gold. In other denominations, price increases are not dramatically higher. And as we see below, the one bright spot–Wall Street–is just more of the same. It only looks good if you count your money in declining dollars. This is what prosperity looks like–at least prosperity as defined by Washington and the Fed.
(BTW, it’s not just the Dow Jones. Below is the S&P, which is even worse than the Dow when dollar devaluation is taken into account.)
Following up on yesterday’s post about how the government has come to control so much of our economy and our lives that it now basically begs for the rich and connected to control it, comes a related story about how government has outgrown its ability to be effectively managed. (ht:GR)
| Category: Culture
| Posted at: Wednesday, 27 April 2011
Drudge highlights the story of a 25-year old television star who currently graces the cover of Playboy.
Dog bites man. Except that this particular woman is Muslim. Sila Sahin, the star of a German soap opera, is the daughter of Turkish immigrants in a country containing 3 million Turks. So why did she do the photo shoot?
“What I want to say with these photos is, ‘Girls, we don’t have to live according to the rules imposed upon us’.”
The reaction is predictable. Her mother has cut off all contact with her. Muslim websites are aflame. A German news program interviewed a local restaurateur who said what he would do if Ms. Sahin were his own daughter:
“I would kill her. I really mean that. That doesn’t fit with my culture.”
As the father of a teenage daughter, I can empathize with the family’s shock and disappointment. But where you lose the argument is when you lose all sense of proportionality. In the grand scheme of things a 25-year old woman’s decision to pose nude is a minor misdemeanor. It is not a capital crime.
I’d love to hear a General Napier* like retort, but since I don’t expect to hear that kind of culturally confident response from today’s Western leaders, I’ll respond in the only way I can. I’m going to vote in this contest between liberty and lunacy by buying a copy of the magazine. I might even read the articles.
(BTW, if you don’t happen to live in Germany and can’t get a copy of the magazine, click on the picture above to take you to the magazine article. Sorry, if you don’t speak German, you’re out of luck. Something tells me, however, that the language barrier won’t be a problem.)
*If you don’t immediately recognize the reference, General Sir Charles Napier was the commander of British forces who conquered much of what is now modern-day Pakistan. Disgusted by the local practice of “sati,” wherein a widow was tossed onto the funer pyre of her husband, Napier was reported to have told a local chieftain:
“You say that it is your custom to burn widows. Very well. We also have a custom: when men burn a woman alive, we tie a rope around their necks and we hang them. Build your funeral pyre; beside it, my carpenters will build a gallows. You may follow your custom. And then we will follow ours.”
Roger Pilon penned a post lamenting the fact that recent campaigns for President have become so long, beginning at least two years before the election and continuing throughout every day in office.* He concludes with this:
“Part of the reason for the change is the need today for vast amounts of campaign cash. But the deeper reason, I submit, is because politics has taken over so much of life.”
Roger is right, but let me elaborate.
It is because politics has taken over so much of life that there are vast amounts of government money available. That supply of government largesse, in turn, has led to a huge supply of campaign cash. And it is that campaign cash that enables the permanent campaign. Without an all-encompassing government, we might be able to go back to Silent Cal napping in the White House.
I’ve been working on a series of articles that highlight several politico-economic rules that I’ve observed over the last four-and-a-half decades. I humbly submit that any sustainable long-term plan aimed at restoring a resurgent American economy must take into account these rules. More on that later.
But I’ll share two of those rules with you now because they have a direct bearing on Roger Pilon’s post:
1. If you want to get money out of the business of determining politics, you must first get politics out of the business of distributing money
2. Those with the most, have the most to lose. They also have the most to give to ensure that they lose the least.
Think about it. Comment.
*Hat tip to attorney Glenn Reynolds, who has long said related words to the effect of:
“If a business can get a better return on investment from a lawyer-lobbyist than it can from a research engineer, the economy is ultimately doomed.”
President Obama is on the warpath against the oil companies. (ht: GR) As he should be, since obviously, the evil, greedy oil companies are taking advantage of consumers–just as the economy is about to skyrocket to success as a result of the President’s brilliant strategy of extending the Bush tax cuts and tripling the Bush deficits.
Or maybe there’s another reason for increased prices at the pump.
The price of gasoline is largely a function of the price of oil, so let’s look at the price of oil. According to the Department of Energy’s website, the Cushing, Oklahoma spot price for a barrel of oil on April 26, 2010 was $84.20. On April 15, 2011 the price had climbed to $109.17. That was a nearly 30 percent increase; 29.66% to be exact.*
Did it really cost 30% more to get oil out of the ground than it did a year before? Remember, six days before the start of this study, the BP Horizon oil disaster began; now that the spill is past, we should have seen some decrease. Of course there is the ongoing crisis in Libya, but that country produced only 2% of the world’s daily output; certainly so small a reduction in supply couldn’t be the impetus for a 30% increase in cost. As for the economic climate, while we’re technically out of a recession, it’s not exactly gangbusters like it was before the banking collapse in 2008–the last time oil prices were this high. So, obviously the President is right to pin the blame on the gouging by the oil companies.
Except for one thing . . . Oil, whether it comes from under Arabian sands, from beneath the North Sea, or from Cushing, Oklahoma, it is priced in US Dollars everywhere around the world. The price is quoted in Dollars per Barrel. That means that the value of the numerator is just as important as the value of the denominator. And as you’ll soon see: lately the numerator is even more important.
Priced in US Dollars, Oil is up almost 30% in the past year. However, if we hold the exchange rates constant to where they were a year ago and show costs of a barrel oil as a percentage of where they were on April 26, 2010, we get some wildly different results.
What we observe is that the price of oil has increased in US Dollars (shown in black) much more than oil has increased if it was bought in Euros, Canadian Dollars, Australian Dollars, Swiss Francs, or Norwegian Kroners. In fact, in the two countries above which have employed strong money policies (Australia and Switzerland) we see an increase in the price of oil of only 14.4% and barely 8%, respectively.
It’s not just oil. Another commodity that has seen great increases in price–and which is priced in dollars around the world–is wheat. While increases in the price of wheat have been attributed to Russian drought and other causes both natural and unnatural (ie, increased ethanol production), a closer look shows us that the value of the dollar is again a major culprit.
With wheat we see a similar pattern. Up over 52% in US Dollars, the percentage increase is less in every other currency evaluated. Again, the Australian Dollar and the Swiss Franc showed the smallest increase, 35% and 27%, respectively.
What about gold–supposedly the ultimate store of value?
Up almost 28% in American Dollars–enough to make gold bugs giddy–the yellow metal has increased less than 13% in Aussie Dollars, and is quite stable in Swiss Francs, up less than 7% there.
But that brings up an interesting point. The ideal money, at least according to such antiquated authorities as Ludwig von Mises, is something that is a reliable store of money. That is, that it doesn’t decrease in quality or quantity over time. Gold, because it is so chemically stable, was fairly good in this regard. But since we now deal in fiat currencies, let us compare currency stability as well as inflation.
Above I’ve calculated the price of each of three commodities in six different currencies and shown the standard deviation of their prices as a percentage of the mean over the past year. For all three commodities, we see that the US Dollar has the highest standard deviation. In other words, it has the most volatility or the least predictability. Predictability in pricing is important to the baker and to the refiner. Each buys raw materials today at a price that he thinks will allow him to make a profit on a finished good at some time in the future. But what we see here is that the price in dollars is the least predictable.
Manufacturers in Bern and Brisbane have, not only more price stability than do producers in Boston, they also enjoy lower rates of inflation. Even more astounding, Bostonians fare even worse than the residents of Brussels. Given that the Euro is a virtual basket case as a result of two bailed out economies (Ireland and Portugal) and a third bailed out country virtually certain to default (Greece), the fact that the US Dollar by every meaningful measure fares even worse, maybe the problem is much greater than the oil companies.
Maybe the problem behind why it takes so many dollars to fill a tank with gas is the US dollar itself.
*Just so I’m not accused of cherry-picking my dates, I pulled data for 365 days, but because I wasn’t able to find complete information for the most recent dates of the period, The period I’ve considered, 26 April 2010 through 15 April 2011, is a bit less than a full year. Readers are encouraged to update this through 25 April of this year. However, since the price of commodities has skyrocketed again this week while the value of the dollar has fallen, I suspect that the most updated data will only add more substance to this study.
Also, I’ve looked at pricing in Japanese Yen and British Pounds as well. I didn’t consider them as alternatives to the dollar because each of those countries have employed a loose money policy and a high deficit, just like the United States. Not surprisingly, both currencies show rates of inflation and volatity similar to those of the dollar. In dollars wheat is up 52.44% over the past year. In pounds it is up 63.22%, and in yen it is up 57.02%. Oil is up 29.66% in dollars, 38.82% in pounds, and 33.55% in yen. As for volatility in pricing, both the pound and the yen are within a percentage point of the dollar.
The bottom line: countries which have employed strong (or at least stable) currency policies have fared far better over the past year than the dollar.
I’m seeing some alarmist rhetoric from both sides of the aisle that the failure to raise the debt ceiling will lead to all kinds of calamities, from default, to inflation, to earthquakes, and unwanted facial hair.
None of it is true. All that would be required is that the Treasury couldn’t issue debt above its current limit. Sure, the current budget “obligates” the President to spend a few hundred billion dollars above that amount by the end of this fiscal year. But therein lies an opportunity for the President.
From 1803 to 1974, this would not have been a problem. Through the magic of something called “impoundment,” Presidents spent less than the budget authorized virtually every year of the nation’s existence. Like a lot of questionable laws at the height of the Watergate era, impoundment ended when Congress short-sightedly took powers from President Nixon. Impoundment basically meant that the President didn’t have to execute all spending that was authorized in the budget. Since 1974, and since the Supreme Court’s ruling in Train v. New York City upholding the anti-impoundment law, the full budget must be executed. Anyone who has worked any length of time in the Federal government knows the foolishness that this can cause. During the last weeks of September, before the close of the government’s fiscal year, all kinds of frivolous spending ensues because the money HAS to be spent.
So here’s how the President wins by losing. If the debt ceiling isn’t increased–something I advocate, but that’s beside the point–Obama immediately announces his impoundment plan. It wouldn’t be hard. He only has to trim spending from mid-May, when the ceiling is expected to be reached, to September to get through this budget year. There are tens of billions of dollars of easy cuts he can make to GOP programs. Those would be the first on the list. Next up would be the Department of Defense. As a lifelong Army officer, I’m here to tell you that I could drop a quarter trillion dollars out of the defense budget and make the military MORE effective as a result. The waste is astounding and it begins at the top with the military’s heavily bloated senior leadership. Contracts and commands would be the first to go.
So all the President has to do is to come up with his list of items he won’t buy and then send it to Congress as a rescission. A rescission is a request to rescind certain items from the budget. According to the 1974 law, Congress has 45 days to act on it or, without action, the spending must go into effect. So that’s 45 days that a GOP House has to squirm under the klieg lights of fiscal discipline. It won’t be comfortable for them. Sure, Congress could respond with their own list of rescissions, but that then requires a Presidential signature, so negotiations would ensue.
Meanwhile, the President still holds the upper hand. That’s because, he is under the direction of two different laws in direct conflict with each other. The anti-impoundment act would require him to spend every dime of the budget, while the debt ceiling would prohibit that very spending. And as for raising revenue to make up the difference? Constitutionally, that’s a measure that can only originate in the House.
But what about precedent? What about it? Train v. City of New York never considered the situation of the President exercising his impoundment authority in the face of two contradictory laws. Furthermore, using the same rationale that former Justices Rehnquist and Powell advanced in Goldwater v. Carter–that is, that essentially political disagreements between the two branches of government were ineligible to be heard by the Court–I doubt that the Supreme Court would even take the case. That would leave President Obama with the upper hand in his effort to control whatever it was that he wanted to cut from the budget until he and Congress were able to come to some sort of agreement.
And here’s the beauty of the plan from the President’s perspective. Pitting the anti-impoundment law against the debt ceiling limitation puts the GOP House in the position of either raising taxes or accepting Obama’s cuts to GOP pet programs. Heads he wins; tails they lose.
Would he do it? I doubt it. But bully for him if he does.
Dovetailing nicely with last week’s post about how representative governments, unconstrained fiat currency, and unlimited debt cannot long co-exist, we have this from Raghuram Rajan.
Democratic governments are not incentivized to take decisions that have short-term costs but produce long-term gains, the typical pattern for any investment. Indeed, in order to make such investments, democracies require either brave leadership or an electorate that understands the costs of postponing hard choices.
Rajan cautions that in democracies, “debate does not lead to agreement, moderate voters do not know what to believe, and policy choices ultimately follow the path of least resistance – until they run into a brick wall.”
True enough. But when the governors on the system–currency valuation and level of debt–are removed, the collision occurs at much higher speed. Since the fall of 2008 we have slammed on the gas in spite of the brick wall up ahead.
Read the whole thing.
There are less than ten hours until the federal government shuts down for all but essential services. Consequently, I don’t know when I’ll next get paid. That being said, I say: Shut it down. When the American people see how little they miss from the loss of government, the politicians will finally get the point–that is, that it’s time to scale back.
So I say: Shut it down!
| Category: Culture
| Posted at: Wednesday, 6 April 2011
And now for something completely different . . .
Inspired by Glenn’s admonition to keep an open mind, I wandered over to Al Dente to see how (or if) bacon could be made better. There I saw a recipe for maple-glazed, oven-roasted bacon. I was further intrigued, not to mention, further inspired, by Moe Lane’s blogging of the results.
Well, it so happened that I had a pound of bacon (Hormel, center-cut, thick-sliced), as well as a bottle of Grade A amber maple syrup. But never being content to leave a recipe at rest, I decided to add a little something extra.
In addition to trying the recipe, I decided to try an experiment. So I made some oven-roasted bacon with no accompaniment–the null hypothesis. Along with that I made the oven-roasted, maple glazed bacon using the Al Dente recipe. Finally, I roasted a third batch using a glaze that I made from equal parts maple syrup and a coarse ground Dijon mustard.
Here are the three separate trays in the oven:
Yes, European ovens are small (It’s a good thing that I’m not cooking a 24 pound Thanksgiving turkey this November.) This particular oven is also not particularly uniform in temperature–even with the convection setting–so that provided some difficulties to the experiment. To compensate for the uneven heat, I had to rotate the three different trays of bacon frequently since the one on top was cooking more quickly.
Here are the three experiments on the same rack cooling and draining. In the upper left is the maple-glazed recipe. In the lower center is just plain bacon. In the upper right is the honey-mustard-glazed bacon:
And the results . . . I first tasted the Al Dente recipe. The flavor was good. The maple came through. What was disappointing however, was that the bacon didn’t have the crisp praline crackle I wanted. I was expecting crispy caramalized bacon, and instead I got bacon that was coated with a nice flavor, but a flavor that had assumed the consistency of the caramel filling of a snickers bar: chewy, not crisp.
The difference between crisp and chewy became more apparent when I went next to the unadulurated bacon: crisp, clean, pure bacon. Now, having said that, I’d like to see the same experiment carried out side by side on the same tray to see if the cooking insconsistencies of my European toy oven skewed the results in plain bacon’s favor. Nonetheless, as the sayin goes, less is more. And the saying proved correct in this case.
The third recipe was now up. And if one ingredient bested two, was their any hope that three would be better? As it so happened, there was. The maple flavor certainly came through. But the sweetness was also cut by the bitter mustard. Sweet and savory combined with salty and crispy–yes, crispy–produced a clear winner in this taste test experiment. Perhaps it was because the addition of mustard thinned the syrup’s consistency, causing the water to quickly evaporate and allowing the maple to caramelize on the bacon, or maybe it was because my oven favored the tray of bacon that ended its cooking time on the top shelf, but whatever the reason, the soggy chewiness of the maple-glazed bacon was gone. Instead we had crispy bacon with the infusion of more flavor. A win-win, indicating that yes, it is true: bacon can be made better.
There was one more taste comparison. It so happened that I had two fresh ciabatta rolls as well as some farm fresh eggs. How, I wondered would my bacon taste in a Euro-version of an egg McMuffin? The two finalists: pure bacon and honey-mustard bacon each joined a fried egg atop the toasted ciabatta roll.
Drumroll . . .
Well, perhaps it was just too much of a good thing. In both case, the addition of two more ingredients–roll and eggs–brought down the bacon. By itself, the bacon was better than it was in a sandwich.
So there you have it. Less is more, indeed.
To a structural engineer, the triangle is the perfect shape. So long as the legs themselves and the connection between them remain unbroken, it is undistortable and highly stable. For the same reasons, a three-legged stool is also highly stable; even on an unlevel surface, it always remains in balance.
What is true with trusses and tripods is also true with economies. America’s long-term fiscal strength is a function of three legs that traditionally pull in opposite directions.
At the 12 o’clock position is government spending. Unconstrained, government spending would grow logarithmically. The Founders inherently understood this, as Benjamin Franklin made clear when he told a questioner that the new Constitution established, “A Republic, if you can keep it.” Implied was the need for balance to keep the Republic’s representatives from pandering to the populace.
At the 4 o’clock position sat one of those balances: America’s debt. Alexander Hamilton, the first Secretary of the Treasury knew that the nascent nation’s debt conditioned representatives to the idea that credit must be repaid while it informed the world that America would honor her obligations. It was for this reason that in Federalst No. 30, he urged the Federal government to assume the existing debt of the thirteen individual colonies.
“In the modern system of war, nations the most wealthy are obliged to have recourse to large loans. A country so little opulent as ours must feel this necessity in a much stronger degree. But who would lend to a government that prefaced its overtures for borrowing by an act which demonstrated that no reliance could be placed on the steadiness of its measures for paying? The loans it might be able to procure would be as limited in their extent as burdensome in their conditions.”
Since 1789 America has operated on that principle. And it is for that reason that U.S. Treasuries have long been considered the world’s safest investment. The world knows that America always repays its debts.
At the 8 o’clock position is the third leg providing balance to the economy. It is the value of the dollar. From the Founders’ perspective, this was largely unaddressed–or more specifically, it was addressed only in the sense that they frequently mentioned gold and silver as a means of currency. That’s because in the late 18th century there was little confidence in the concept of a fiat currency. The Founders assumed that since money would always be tied to a hard commodity the value of money could not suffer from severe distortions.
In short, the long-term strength of the American economic system rests upon the balance between the amount of government spending, the level of government debt, and the value of the dollar. Each leg affects the others, and in turn acts to restore balance to the overall system. Too much spending pushes debt yields higher, making new borrowing more difficult. Devaluation of the currency, as FDR instituted when he pegged the dollar to less gold, drives the cost of imports higher and prompts retaliatory measures from nations accustomed to US exports.
Thus, the value of the dollar and the level of debt were the balance that would enable Ben Franklin’s questioner to keep the Republic. That was because a republic, unconstrained, would always overspend. The other two forces kept that tendency in check.
But imagine the tripod if you held constant the leg at 12 o’clock–the tendency of representative governments to increase spending–and brought the other two toward it. Is a stool with three legs pointing in the same direction inherently stable? No. And that is where the economy is heading.
Washington spends as if it is unlimited by the level of debt. The CBO estimates that for the third year in a row the annual deficit will approach ten percent of GDP. Forty cents of every dollar spent by the government is now borrowed from the future.
Meanwhile the number of dollars, now unconstrained by a physical or legal limitation to the amount that can be in circulation has exploded to such an extent that gold is at an all-time high, oil has tripled in three years, and copper is now above its 2008 peak, in spite of the fact that the largest consumer for copper–the construction market–is in a depression.
We now attempt to balance representative government on the other two legs whose new names are “unconstrained fiat currency,” and “unlimited debt.” Sure, a temporary balance has been achieved by the Federal Reserve buying the bulk of the government’s newly issued debt. But that only keeps yields artificially low, and only for a little while. Furthermore, it’s a moral hazard, encouraging even more debt, rather than acting as the counterbalance the Founders intended.
Or in context of the stool, we now find ourselves leaning back on just two legs: debt and devaluation. But let us not mistake the temporary balance restored by our wild waving of arms for what it really is: the signal of a tipping point followed by a crash.