Austerity Is Bad!

In a true classic of the genre, a certain Mr. Jason Cherkis this week penned an article for the Huffington Post titled, A Thousand Cuts: Austerity Measures Devastate Communities Around The World.

The genre to which I refer is where the author dredges up a heart-wrenching story to wave about in order to elicit an emotional response in support of his position. In this case, it is his position that making any cuts in government programs is not just a bad idea, it is cruelty itself. In the case of his story, the cruelty is inflicted on a laid-off female municipal bus driver.

Apparently, the Huffington Post is so enamored of this theme, and of this particularly mindless form of journalism - propaganda, actually - that it is going to run a series of similar stories. Here's how they advertise the series...

"These stories chronicle austerity's collateral damage: the suicide-inducing fear that impending cuts created in the U.K., how one girl's grades suffered when her class size grew, the loss of personnel that made battling fires more dangerous for one New Jersey town."

While I am all atwitter in anticipation of the next installment, for the time being I will have to live with just the sad tale of the bus driver, a tale which included the following heart-tugger:

On her last day, Miller worked a Sunday route, picking up elderly riders in downtown Pittsburgh and driving them to churches in the Hill District.

"I used to call it driving my Miss Daisies," she explained. The women would board in their Sunday best, with neat dresses and big hats. "Every time I think about it makes me want to cry," she said before beginning to sob.

Now, don't get me wrong, I know that being laid off causes all sorts of problems - how could it not? But one person's sob story has zero relevance to a mature discussion about which policy decisions will best foster a thriving economy. To conflate the two is not just stupid, it is pathologically stupid and a calculated attempt at fooling the masses.

So, let's approach Mr. Cherkis' argument, such as it is, in a more methodical manner. For example, by taking it to its logical conclusion. According to him, and the HuffPo...

• Cutting government spending is inhumane and causes suffering.
• Therefore no further cuts should be made.
• Therefore, the deficits should continue apace, swelling the bloated budget to infinity (or as close to infinity as it can get before collapsing the economy).
• And if less government spending is bad, then almost by definition, more government spending would be good. After all, at this point close to 20% of the US population is either unemployed or underemployed. Think of all the hardship stories one could come up with in a sample that large? The obvious answer is to just turn up the taps on the spending.
• Oh, but I suppose there has to be some attempt to pay for all this spending. Where to find the money... hmmm... let me think... who could be tapped to pay up even more...? Oh, I've got it! The rich!
  
  Logically, the first step in doing that is to set the right parameters... in this case, by identifying what constitutes being rich in America these days? I think many people would agree that anyone pulling down more than $250,000 a year is doing pretty well, so let's start there.
  
  Or, more correctly, let's let Dr. Walter Williams start there...
  
  "This year, Congress will spend $3.7 trillion. That turns out to be about $10 billion per day. Can we prey upon the rich to cough up the money? According to IRS statistics, roughly 2 percent of U.S. households have an income of $250,000 and above. By the way, $250,000 per year hardly qualifies one as being rich. It's not even yacht and Learjet money. All told, households earning $250,000 and above account for 25 percent, or $1.97 trillion, of the nearly $8 trillion of total household income. If Congress imposed a 100 percent tax, taking all earnings above $250,000 per year, it would yield the princely sum of $1.4 trillion. That would keep the government running for 141 days, but there's a problem because there are 224 more days left in the year."
  
  Dr. Walter Williams, Townhall.com

Back in reality, the Mr. Cherkises and Huffington Posts of the world who see only positives in elevated government spending, even though it requires adding to the largest sovereign debt load in history, appear to completely fail to accept that actions have consequences.

If I were to play the same disingenuous game, I could quickly find lots of examples of hardship from the tens of millions of elderly retirees who expected to be able to offset their cost of living in their retirement through yields earned on their savings of a lifetime.

A friend reminded me that in 2007, you could get a 4% yield even on a brokerage sweep account. Today those same accounts offer a yield of 1/100th of 1%. Or, as he put it, "for every $10,000 you have in cash that used to pay $400 a year, you now earn $10."

And that's before taxes and the steep erosion of your principal due to inflation. Even if you accept the government's rigged numbers of about 3%, you are losing $300 to inflation... but the real loss is probably closer to $1,000. Think this is causing serious hardship? You bet.

As the anti-austerity crowd wins the day - and they will - governments only have one choice: to crank out the funny money that ensures that the inflation rate will become a much more serious problem down the road.

Why am I so sure that the anti-austerity movement will win the day? Simply because it is in the interest of most people at this point.

The politicians don't want austerity, because it curbs their ability to parcel out economic favors; the masses want the spending to continue (note that the riots in Greece and more recently in Spain were not to get their respective governments to spend less, but rather to spend more); and the big financial houses want it to continue because they are very clever at making sure they get a solid first and second bite at the largess.

Returning to the overarching point, the complete lack of critical thinking or even a basic understanding about these issues among the public ensures that dupes will continue to be duped, and continue to vote in the dopes, until the economy ultimately drops... dead.

If you want to envision a better future for the bus driver, envision the benefits from an economy where the government were dialed back to 20% of where it is today, and the free market - the productive, capital-increasing free market - were allowed to blossom. We'll get there, in time, but not without circumstances forcing the matter.

Okay, a final bad argument by yet another group of smooth criminals.

Rich Is Bad!

It is now completely apparent that the Obama administration's campaign strategy is to focus not on real issues (like, for example, an economy stuck in a death spiral), but rather to go after Romney pretty much solely because he's rich.

Once more, for the record, I am not a Republican, and I don't think that there is any material difference in the two main parties - at least in terms of the actual outcome of whether Tweedle-dee or Tweedle-dum is elected. Call me a cynic or a skeptic, but before you send me strongly worded emails to straighten me out, check the historical record. You could easily black out the names and party affiliations of presidents for the last fifty years, and you'd notice no discernible pattern in the economic data that favors one gang over the other.

Regardless, if you take the administration's argument at face value - that being rich makes a person a bad prospect as president - then what you are really saying is that hard work and success is either a character flaw or that it should not be rewarded. By extension, then, wouldn't the ideal candidate be a bankrupt failure?

The fact of the matter is that logic and principles don't matter to the proponents of these specious arguments. Whether proposing to enslave the youth, to continue piling up unpayable debts, or setting the stage for an economically devastating class warfare, what really matters to these people is to convince the masses to support the steady growth of the state at the expense of freedom and free markets.

This is not a formula for success, it is a formula for collapse and ruin.

Toss into the mix the institutionalized chicanery that is becoming more apparent with each passing day - the growing LIBOR scandal being the latest - and the challenges faced by individual investors looking to avoid being plowed under as collateral damage become extreme.

A bit later on, I'll share the best way I know to make sure you can avoid the worst of what's coming as this trend gathers momentum, but for now, in that it is keeping within the general theme, following is an article by our own Vedran Vuk on the Fed, another group of smooth criminals if you ask me.

How Stupid Is the Federal Reserve?

By Vedran Vuk

Believe it or not, I'm not trying to insult the Federal Reserve with the title of this piece. Unfortunately, every investor has to answer this question, "How stupid is the Federal Reserve?" It doesn't matter whether you're a Keynesian or Austrian economist. If you want to know the Fed's next step, you'll have to start here.

Most Fed analysts have it completely wrong. They weigh whether or not the Fed will act based on economic conditions. Particularly, will the slowing labor market induce further Fed stimulus or not? Unfortunately, this analysis follows standard macroeconomics textbooks rather than the reality of the past four years.

From the textbook viewpoint, the Fed has two options: lower the unemployment rate through additional monetary expansion at the risk of inflation, or stay out of the way for the sake of price stability. In today's environment, this is a false set of choices. In the past few years, the Fed has injected trillions into the economy with little to no effect on the unemployment rate. As a result, the real question for us to answer is, "Considering that the Fed has repeatedly failed, will it again try the same policies in an effort to reduce unemployment?" This isn't a question about numbers and figures. It's a question about the hard-headedness, delusion and stupidity at the Fed.

Unless your head is in the sand, it's obvious that the Fed's policies have been a failure. We already know that economic conditions are bad enough for the Fed to act. In the Fed's last minutes - to the dismay of Obama's election campaign - it plainly says, "...the unemployment rate was expected to still be elevated at the end of 2014."

The gravity of the unemployment situation is obvious. What's not so clear is whether Fed members understand the failure of their previous stimulus efforts. The Fed minutes give us a clue:

Meeting participants again discussed the extent of slack in labor markets. Some participants judged that the unemployment rate was being substantially boosted by structural factors such as mismatches between the skills of unemployed workers and those required for available jobs, a view that would imply less slack in labor markets than suggested by a simple comparison of the current unemployment rate to participants' estimates of its longer-run normal level.... Some other participants acknowledged that structural factors were contributing to unemployment, but said that, in their view, slack remained high and weak aggregate demand was the major reason that the unemployment rate was still elevated.

The idea behind structural unemployment stands on extremely weak footing. There's no need to drag out the statistics here. The economy didn't go from 4.4% unemployment in mid-2007 to 10% unemployment in 2009 because of structural changes. Was there an unexplained explosion of tech companies in this two-year period that required greater skills? Were 90% of college graduates art history majors in this two-year period? Hmmm... no. Maybe... just maybe... the biggest global downturn since the Great Depression has something to do with it.

Thankfully, other members of the Fed presented a different view. But nonetheless, the fact that some actually believe the structural change line is frightening. It tells us that many board members are in a state of denial. They've thrown everything including the kitchen sink at the economy, and it has failed. Now, they're trying to make up excuses for their failure, such as "structural changes in the economy."

So, what does this point have to do with anything? The state of denial among some Fed board members should scare the hell out of you. If they're unwilling to accept reality and the consequences of their actions, then things can only get worse from here. To solve any problem, we must first agree on the facts and reality. The Fed doesn't seem to be there yet. As a result, they will continue to use additional monetary expansion in an attempt to lower unemployment - despite the previous failures.

This is spelled out in the Fed minutes: "A few members expressed the view that further policy stimulus likely would be necessary to promote satisfactory growth in employment and to ensure that the inflation rate would be at the Committee's goal." Yes, folks. They actually believe their actions will promote growth in employment. After all of their failures, this is still the official line.

The Fed's next move has little to do with the unemployment situation. We already know that unemployment is bad. The tougher part is weighing how delusional the central bank has become. In the minutes, there were signs of a few participants with their heads straight, but quite a few have their heads so far in the sand that they're reaching water.