Examining Socialist Myths: Tax Cuts Don’t Stimulate the Economy

Aw Hell. It’s election season again. As someone posted, “It’s a great time to pare down my Facebook friends.” I’m sure a fair amount of that goes on. As an acquaintance of mine recently described it, “Political beliefs are largely an echo chamber. Election season is an invitation to everyone else to enter your personal echo chamber.”

I’ve gotten better about things. I enter fewer political discussions on Facdbook and have greatly reduced my objectives. The truth is that as a Libertarian, I disagree politically with well over 90% of the voting public. So if I responded to every invitation to enter a political argument, I’d never have any to time to myself.

And some arguments are really subjective and not worth discussing. If you think Obama’s the best President in history, good for you. If you think Mitt Romney is the voice of sanity in the political wilderness, good for you. I’m not here to debate things like that. I’m never going to win the argument, first off, because these beliefs are not subject to change. They are part of political identity that people have absorbed and they’re sure as hell it giving them up for me.

But then, sometimes, I just can’t help myself. Sometimes political beliefs are so out there that I just can’t help myself. If a NeoCon is arguing that invading the entire Middle East will usher in a new American Golden Age, I just have to wade into the fray. I can’t say I have any success in converting people, but occasionally people do tell me that they find discussing things with me enlightening.

Which brings us to today’s political Facebook discussion, “Do tax cuts stimulate the economy?” I find it strange that this is a real question, but I am going to treat it as legitimate and go forward from there. Continue reading Examining Socialist Myths: Tax Cuts Don’t Stimulate the Economy

A Special Request for Kevin

My blog reader Kevin wrote,


Stop muttering about that role-playing stuff and check this out:


I would LOVE to see you take the time to deconstruct this article, one line at a time. It’d be a real eye-opener for all the commie pinko VTES players out there.


Well, as long as we’re going after commie pinko VTES players, count me in! Well I read Dr. Reich’s blog entry, and, sure enough, it’s dreadful beyond belief. Not it that typically way a politicians ideas are all hot air kind of dreadful, but in that much more pernicious way thinking that only macroeconomists seems to think.

Continue reading A Special Request for Kevin

Fed Sees No Recovery in 2009

Here’s a fun tidbit from our friends at the Federal Reserve, out economy is not going to be getting any better this year. When last they spoke (oh, gosh, must have been.. four weeks ago) they said that the best we could hope for would be an economic recovery in late 2009. Now they’ve since come out and said that we would see no recovery this year.

Hmmm. Well if that’s the case, why is the government spending all of this money to “stimulate” the economy and bail people out? Was that to speed us to a swift recovery? Now I understand that back before the days of the Fed, when downturns or banking panics would happen, that they might take a year or so to work themselves out. The Panic of 1907 took less than a year. The Panic of 1893 didn’t see the market bottom for more than a couple of years. But that was back in the economic dark ages. Back when our money was backed by gold and we didn’t have sage bureaucrats or wise central bankers ready to print money at the drop of a hat (roughly $13 trillion and counting according to Bloomberg) to bail everyone out. Why, wasn’t the whole reason for all of this stimulus and bailout so that we wouldn’t have to far a protracted economic downturn?

Well, that was the justification given for it anyway. Liquidation doesn’t work is what Ben Bernanke told us, it just makes things worse. So instead let’s bail out the troubled economic actors and get back on the road to a quick recovery. The Fed is now admitting that this recovery of there’s is not going to come quickly. In fact, in comparing the amount of time old style economic liquidations used to take compared to take, the post economic recoveries of the Fed era seem to take quite a bit longer. As I discuss in my book, when you compare the economic history of the pre-Federal Reserve era to what took place after the Fed, it’s pretty clear that we went from an era of frequent economic panics to infrequent economic collapses. That suggests that all the Fed is doing is to postpone an economic downturn until later, but at the cost of greatly adding to its length. Which isn’t really all that great of a service to society when you think about it? Continue reading Fed Sees No Recovery in 2009

Bonds Outperform Stocks Over Last 40 Years

According to Rob Arnott’s recent article to be published in the Journal of Indexes, bonds outperformed stocks as an asset class from 1968 through today. (You can read a condensed version of the article here.) That’s interesting news for those of us who have always been skeptical of the stock hounds. Dr. Jeremy Siegel said in his book Stocks for the Long Run that stocks reliably outperform bonds over a sufficiently long time horizon and so, Siegel argues, you really shouldn’t bother with bonds at all.

I was critical of Dr. Siegel’s advice in my book because, along with bonds, he has a long history of being critical of gold investors. For Siegel, and most conventional investment professionals, they have but one tool in their tool box; for them, it’s always a good time to invest in stocks and never a good time to be invested in bonds or gold. I’m always pleased to see when my criticism of an idea was well placed, and I so I find Rob Arnott’s article rather vindicating. Bonds outperformed stocks over the last fourty years, which begs the question of exactly how long a time horizon you need to be invested for Dr. Siegel’s advice to be holding true. For most people, fourty years is longer than their investment time horizon.

This forty year time span wasn’t actually the longest time period where bonds outperformed stocks. Going back all the way to 1802, there was a 68 year period (from 1803 to to 1871) where bonds also outperformed stocks. What’s even worse news for the stock hounds is that the news is just going to get worse from here. Continue reading Bonds Outperform Stocks Over Last 40 Years

Attention Dr. Lacy Hunt: Your Plan’s Not Going So Hot

The United States and the United Kingdom are both pursuing similar strategies to deal with this global recession: print more money. France and Germany are taking a rather different track and talking about reducing government spending. Germany went so far as to argue before the last G-20 meeting that if it were to reduce itself to “stimulus” spending, then it would become a burden on the rest of Europe; their reasoning being that they would eventually have to raise taxes to pay off their increased debt load and that that would cause a drag on the rest of the European economy.

It looks like Keynesianism isn’t a huge hit in France or Germany, as they are managing to avoid the peer pressure of their deficit spending neighbors. I’m sure Helicopter Ben is calling them up saying, “Come on! Everybody’s doing it.” But no dice. In fact, the President of the European Union Mirek Topolanek recently came out and called Obama’s plan to get us out of the recession a “road to hell“.

Ouch. Continue reading Attention Dr. Lacy Hunt: Your Plan’s Not Going So Hot

Will the Real Market Bottom Please Stand Up?

As I mentioned last week, I expect the market to find a temporary bottom at some point this year and to stage a significant rally. However, I expect that this rally will prove to be a bear trap, as the market will then fall far more to find its true bottom a couple of years from now.

I don’t base this prediction on any sort of economic theory, but rather on history. Prior to the Federal Reserve Act of 1913, economic contractions were short and violent affairs. The Panic of 1907, for instance, was over and done with in a single year. The panic spelled the end of the Knickerbocker Trust Corporation, and many small regional banks failed and wiped out their depositors. This kind of “liquidation” of struggling companies was viewed as a necessary evil back then. No one likes liquidation, but it does its work quickly.

Things are different these days. John Maynard Keynes came along and theorized that all economic downturns were caused by “insufficient demand.” He argued that politicians needed to juice the economy with easy money to get consumers spending again. The fact that Keynes’s theory is nothing more than math piled on top of a foundation that’s part conjecture, and part shaky definitions, did not stop it from becoming popular. Similarly, the fact that Keynes’s prescription of juicing the economy with easy money does not seem to actually prevent recession — but, rather, prolong it, until it becomes far larger and more devastating — has not caused it to since fall from grace. Politicians get elected on promises to give money to their supporters and Keynes’s theory makes it their primary mission to do so.

This is why Keynesianism never goes out of style. Continue reading Will the Real Market Bottom Please Stand Up?

Reaction to Barack Obama’s Speech


Newsweek Cover
Newsweek Cover

I started a three part series “Exploring the Myths of the Consumer-Driven Economy” a couple of days ago, and I intend to get back to that. But yesterday was a day full of events that just demand comment. Ben Bernanke gave assurances and the recession might end this year, and it sent the stock market up and gold solidly down. Then later that day, Barack Obama addressed the nation and reaffirmed what Newsweek had already declared on its cover. We are all Socialists now. 


It was a long hard road to get America here; we have a strong tendency towards individualism and an inherent distrust of the powers of government. At least, we used to once upon a time. Not anymore. Now we have to depend on the powers of the state to correct the excesses of the free market, and we can not rely on the forces of free enterprise to get us out of this crisis. It is only through the intervention of government that we can put this crisis to a end. Or, in the words of our new President:

Continue reading Reaction to Barack Obama’s Speech

Paul Krugman’s Return of Depression Economics

A few months ago I commented on Dr. Paul Krugman’s receipt of a Nobel Memorial Prize for Economics. Well he just recently released an update of a ten year old book he has called, The Return of Depression Economics and the Crisis of 2008. Personally, I don’t see how Dr. Krugman is qualified to talk about the return of the current financial crisis given that he didn’t see it coming. However,  if real insight or predictive power were required for macroeconomists to write books, the field wouldn’t exist. 

I haven’t read the book, so I’m not going to judge the proverbial book by its cover, but judging by the reviews off of Amazon Dr. Krugman doesn’t spend much time in this book addressing our current financial crisis. It would seem that the theme of the book is that more regulation is needed to correct various situations that he feels are excessive and most of the situations he presents (such as Long Term Capital Management) are ten years old. Towards the end of the book, Krugman presents his analysis of the current financial crisis. I am not the least bit surprised to read that he feels that our current crisis was the result of insufficient demand. Continue reading Paul Krugman’s Return of Depression Economics

Out of the Mouths of Economists

I read a lot of different perspectives from different angles on the state of our economy. I expect opinions to vary in what I read. In fact, I need the different perspectives to help give me the complete picture, but sometimes what I read is so outlandish that I almost spit my drink out onto my monitor. Case in point is John Mauldin’s recent “Outside the Box” guest column written by Dr. Lacy Hunt and Van Hoisington. 

Rather than expect you to read it, I’ll summarize it for you:

  1. Tax cuts are a better way to stimulate the economy rather than one-off stimulus checks because people are more likely to spend an increase in permanent income rather than a temporary windfall. 
  2. The annual turnover rate of each dollar in circulation (termed velocity by economists) is going to slow down because of deflationary pressures despite Ben Bernanke’s best efforts. 
  3. In prior economic downturns, consumer prices have continued to fall for sometime. Because of this, long-term government bonds have proven to be excellent investments during these deflationary contractions. Since we’ve got a ways to go with ours, go load up on Treasury Bonds.

It was the last suggestion that made me lose my cookies. At first I thought I must have misread the concluding sentence of the column, but when I went back, there it was: “As a hedge against a recurrence of a prolonged debt deflation, some investors may want to consider even larger positions in high quality, long term Treasury securities.” WHAT!

How on Earth could two people pen an article that starts off talking about how furiously Ben Bernanke is running the printing presses and conclude with ‘go long on bonds’? Aren’t these people educated? Oh wait, I think I see the problem. The article was written by “Dr. Lacy Hunt.” You see, any ignorant person can spout off some bit of economic nonsense, but it takes a PhD in Macroeconomics to really strike gold when it comes to nonsensical statements. As I wrote in my book, “What Do You Mean My Money’s Worthless?” Macroeconomics is a junk science devised by a hack named John Maynard Keynes. To say it’s littered with fallacious concepts is to not understand the nature of the problem; it’s not littered with fallacies, it’s based on them! Should macroeconomists get anything right it’s not because of their economic training, but in spite of it. 

The problem that this article makes is based on the fallacy that the an economy can be understood as a mathematical phenomenon rather than as a psychological one. Don’t get me wrong, I have nothing against mathematical descriptions of complex systems. I got my BS in Chemistry. I can tell you all about them. But the economy is not a buffer solution and Ben Bernanke is not a chemist trying to calculate the right about of acid to add to bring the pH of the solution back from being overly basic.
Economies are simply collections of people and resources. Economics then is a study of how individuals or societies make decisions regarding how to allocate their labor and resources, and how those decisions can be improved. To look at them as impersonally as a chemist monitors a pH electrode is to assume that you can not only understand what’s going on, but can be in control of it. Of course, that’s exactly the illusion that government bureaucrats love, which is why Macroeconomics exists at all.

This article supposes that we in the United States are undergoing an economic crisis similar to the Great Depression or 1872-1894 series of banking panics or Japan’s Lost Decade. Long term government bonds did well in those times, so they should do well now. What seems completely lost on the authors is that, in two of those crises, the currency in question was backed by gold. In all three of these crises, the countries in question were running a trade surplus and were nations made of savers. That is nothing like the crises we are in right now. We are a nation of debtors and we are finding ourselves simply unable to take on any more debt. Into this breech steps our fearless central banker to create all the money anyone would want to spend; arm in arm with the central banker, is our government that, as always, is here to help. It figures it can borrow and spend all the money that the consumers won’t.

It’s ironic, but these economists who seem the US economy as a series of cogs and gears don’t seem to understand the concept of an open system. In chemistry, an open system is free to gain or lose energy from outside. Therefore an open system does not have to reach equilibrium because it can be receiving energy that keeps it constantly out of a state of equilibrium. It is only when the system becomes closed and is no longer able to receive energy from the outside that it must seek an equilibrium and, eventually, cease being dynamic.

These economists are looking at the US as a closed economy where the economy is slow to respond to the printing of money from the central banker. They don’t seem to understand that it is actually an open system receiving a great deal of energy from the outside in the form of continual infusions of goods and services from our trade partners who may want to get paid back someday. Are we to expect that the other nations of the world are just going to continue to loan us money as interest rates hover at zero, the central banker has gone on a printing spree, and our government has dedicated itself to running trillion dollar deficits until moral improves? Do we not expect that some other nation might want to use some of its savings for itself and, should that happen, interest rates will go up and not down. That’s ignoring, of course, the possibility that the United States might simply default on the debt entirely.

Perhaps, instead of comparing our situation to past economic crises, these two should have compared it to the economic collapses that dot the third world? Or perhaps they should have studied Chemistry.

Economists Announce Biggest US Job Loss Since 1945

The forces of depression are getting a drop on the new year. The bureau of labor statistics announced today that the US had undergone the biggest job loss in the United States since 1945 in 2008. These days people are expecting bad news, but what the questions that we need to ask is how come no mainstream economist saw this coming? How come we don’t see Keynesians falling all over themselves admitting that their phony theory has little predictive value in the face of the tremendous magnitude of this decline? After all, Keynesians tout the stimulating effect of government deficits. How can it be that after eight years of George Bush, who took this country further into debt that all of his predecessors put together, that we are now facing the worst economic scenario since the Great Depression?

Of course, I know how unseemly it must be for me to be attacking John Maynard Keynes on the eve of President-Elect Obama’s inauguration. The man hasn’t even gotten to power yet, and I’m already faulting the underpinnings of his economic bailout plan. And while I’m attacking Obama, what’s up with appointing lobbyist Willian J Lynn III to be the #2 person in the Department of Defense? I thought Obama was supposed to be cleaning up Washington by keeping lobbyists out of his administration. At least, that’s what Democratic talk-shot host Rhadi Rhodes was shoving down my throat back when I called into her radio show. On that particular day Ms. Rhodes was talking about the cronyism going on in the Wall Street bailout and I called in to showcase that this was another case of where the government had proven very ineffective at performing any regulatory function because the oversight boards are inevitably dominated by the corporations they are supposed to watchdog. She fired back how Obama was going to change all that. “Change I could believe in.”

Well, I don’t mean to run the poor man down, but if he’s made a pledge to keep lobbyists out of his administration, then why break the promise? I’m sure there are plenty of other well qualified non-lobbyists out there who can run the post. And this is the Department of Defense we’re talking about. That’s only the nexus of government and the defense industry which President Eisenhower warned about in his farewell address– a warning that has since gone ignored. 

When looked at from a purely Libertarian standpoint, the US Government has three branches, but they aren’t the ones you’re thinking of. Instead of the Executive, Legislative, and Judicial, the US Government has the Banking, Defense, and Welfare branches. The Defense industry expands the empire, while the Welfare branch keeps people appeased in the classic Roman “Bread and Circuses” combination. The Banking branch ensures that the other two branches have all the money that they need in order to function by creating money out of thin air and sending the bill to our future generations. 

As I’ve said many a time, this story is not going to end well. No amount of bank created stimulus can keep this impossible situation going. It’s going to collapse, and soon.