Congressional Budget Office see $1.1 Trillion Deficit for 2012

The Congressional Budget Office (CBO) yesterday forecast that the deficit for fiscal year 2012 will again exceed $1 trillion. The CBO has a reputation for shooting straight, so these numbers are not likely to have been spun. To put the deficit into perspective, that’s 7% of GDP, down from 9% in FY 2011.

Politicians could build confidence by setting a credible goal of running surpluses within five years. It’s a fascinating note of the times that people advocating such a goal are discounted as fringe elements.

Declining deficits are good news, but the financial improvement could prove to be too little, too late.

Washington took a big swing and missed with the SuperCommittee. That was its second golden opportunity to put the country on a sustainable financial track during the Obama Administration. It’s first strike was not poo-pooing the plan Obama’s Simpson Bowles Commission put together.

Is Ron Paul Right – to Abolish the Fed?

There are many legitimate opinions surrounding the Fed’s scope of action. Ron Paul’s position to abolish the Fed won’t win the endorsement of many economists, including those that lean right.

But Ron Paul’s basic complaint is entirely justified – that the Fed is responsible for excess inflation and the long-term decline the US dollar.

It is my opinion, Federal Reserve policy is largely responsible for Golden Age that ran from 1983 to 2008 which morphed into serial booms and the subsequent massive financial crisis.

Note that those Fed policies were extremely popular among rich and poor, borrowers and lenders, right and left, public entities and private citizens, Americans and foreigners Then. Now people feel differently.

There is some serious talk of returning to a partial gold standard. That would reduce the Fed’s currently unlimited ability to manipulate the money supply. See Robert Zoellick, former US Trade Representative and current head of the World Bank.

Though nominally independent, the Fed must bend to political winds. The real problem is politicians and citizens endless appetite for cheap money.

Moving to a gold standard, or simply fixing the supply of money at some arbitrary level would end the debauching of the currency, but conventional thought (which could certainly be wrong) holds that it also would result in more frequent and deeper recessions.

Personally, in retrospect it seems to me that regular recessions are a necessary part of an optimally healthy long-term economy. Recessions may be an inoculation against depressions. See this post for more.

In short, Ron Paul is on to something. He brings up a real issue that deserves a real debate. I applaud him for that.

(To leave a comment: click on the ‘Leave a Reply’ link nearby, or the balloon in the upper right corner. Thanks much.)

Mahathir says “West Needs to Go Back to Capitalist Basics”

Mahathir Mohamed earned notoriety on a number of scores when he was prime minister of Malaysia from 1981 through 2003. He piloted his country deftly through the Asian financial crisis of 1997.

Never one to shy away from controversy, the Financial Times published his piece today titled “West needs to go back to capitalist basics“.

He refers to the current economic problems by saying, “…America and Europe became poor. The refusal to accept their impoverishment has resulted in their refusal to accept austerity measures…This simply aggravates matters.”

He is right that the West is refusing to accept its impoverishment. America and Europe have many powerful voices saying that there is an easy way out from under the mountain of debt.

These voices say that more debt is the answer; that it is necessary to buy time to restructure the economy. And that argument possesses persuasive power via its promise of ease.

However, the “borrow today, we’ll restructure tomorrow” argument lacks credibility. For most countries, the restructuring is too painful. It never comes.

Mahathir continues: “they (the West) must go back to doing real business, ie to produce goods and sell services”.

It is here where West resists. To preserve the standard of living of its people, the West requires either enormous productivity gains, or relatively lower wages. The former is practically difficult, though perhaps not impossible. The latter is politically difficult, although perhaps inevitable.

Mahathir’s career has been the feedstock for millions of arguments over the past three decades.

His recent thoughts urging the West to become competitive again, ring true to this observer.

Unnatural Tinder Building in Economy

If you find the tired explanation that poorly regulated banks brought down the economy to be a little shallow, there are alternative causes.

Writing in the Wall Street Journal over the holidays, Mark Spitznagel points out an excellent, in my estimation, though ignored explanation.

Economies, like forests, often rely on forest fires to maintain optimal health. The economic equivalent of forest fires are bankruptcies and recessions.

They destroy the old to make room for the new. Some conifers actually require fire to trigger growth in long dormant seeds lying on the ground.

In econospeak, that’s creative destruction. The destruction part makes policy makers wretch with anxiety, for it often applies to their jobs, as well as those of other people. But it is likely necessary to get the most from the creative part.

Recessions may be healthy.

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Footnote: Wall Street Journal. 22 Dec 2011. Mark Spitznagel, Christmas Trees and the Logic of Growth.

Unfortunately a Wall Street Journal subscription is required to access the whole article online. It is available at: http://online.wsj.com/article/SB10001424052970204903804577082533052728286.html?KEYWORDS=spitznagel#articleTabs%3Darticle

Our Dearly Departed Golden Age

Now we know how a Golden Age dies.

After suffering real recessions every three to five years prior to 1983, the US had 25 years of clear economic sailing. Only two short, shallow recessions interrupted until the 2008-2009 storm blew in.

I had a ringside seat. Watching the economy has been part of my professional responsibilities since 1981.

The good years started after the cigar-chomping Paul Volcker induced recession and stomped inflation. It was painful. And heroic. Reagan stood behind him. Then the economy bloomed.

Greenspan followed. With both luck and skill, he gave the world what it thought it wanted – steady growth, low inflation, and cheap money.

Unemployment was so low that an astute observor quipped; “Even people who shouldn’t have jobs, have jobs”.

Prosperity bred confidence. That confidence led to greater risk taking. When that risk taking paid off – and it certainly did – it morphed into a sense of financial invulnerability. Then both private and public institutions loaded their trucks with even riskier bets. Individuals did the same.

But, of course, eventually it was overdone. Wildly. The crash splattered blame everywhere. Borrowers and lenders. Public and private. Rich, poor, and middle class. Foreign and domestic.

Curiously, the most valuable lesson has not yet been learned. Few dare even to think it. Fewer still will speak it.

We have to take recessions. They are natural and necessary reminders that trees don’t grow to the sky.

Fix The National Budget #2

Do it your way. Spend a few quick seconds on this second-of-a series.

1) Click HERE to pick up where we left off last time
(Having trouble with the link? Cut and paste this into your browser: https://www.mygovspending.com/advanced/My_Household?ss=369)

2) Click on “Open Notes” and expand that window by grabbing the handle in the lower right corner and dragging it down.

3) Let’s resume by looking at the Cash Income line and the lines following.

The numbers here and below are key clues to government’s involvement in your life.

It’s not pretty.

4) Your thoughts?

Deficit Hawk – David Walker

David Walker is a Name-to-Know in the battle for governmental financial responsibility.  He knows what he’s talking about. He was head of the US General Accounting Office under both Clinton and W before he left to fight deficits full-time at the Peter G Peterson Foundation. Now he’s pursuing the same mission leading the Comeback America Initiative.
If you’ve seen the movie IOUSA, you’ve seen David Walker in action.  If you haven’t check it out.
Take his Fiscal IQ quiz then read his explanation at the end.  Don’t worry about your score.  Think of it as an exploratory mission, not a mission of conquest.
Also, he’s attempting to forge a bi-partisan coalition.  To do that, each side has to see him as hitting the other side with at least as much pain as they think they are taking.
And remember that a point or two he presents as fact are actually opinions. I was tweeked a bit along the way, but hey, I’m an adult…one who believes in freedom of expression.  So I didn’t get all bent out of shape even though I disagree with pieces.
His goal is deficit reduction, almost whatever it takes to get there.  That might be different than you or I. That’s OK.

I suggest that you take his quiz.  It’s good stuff.

Rhode Island Union Boss: "They are not acting like democrats"

Pensions and retirement funding are the core of this nation’s looming financial difficulties. Rhode Island stands tall and faces the problem.
In spite of most expert opinion, national politicians have not yet deemed Washington finances as worth the effort to fix.
Rhode Island decided it no longer has the luxury of waiting.  It has long possessed one of the least financially prudent state governments.  
Two key points:
* Dems pulled a Nixon-in-China and “disrespected” their union base to get the job done.
* Younger state workers broke with their unions and supported the plan. They’d rather have some state pension  than none. 

Tea Party Thought Infiltrates French Academia

Theo Vermaelen, a professor of the elite French University Insead, illustrates a central point regarding government and human nature.
Incentives matter.  For politicians, too.  He says we should pay them for fiscal discipline.
His plan is to compensate politicians with bonds issued by the countries they rule. Then they bear the risk of their actions in the form of actual, real financial losses. 
Professor Vermaelen writes that this “could be used to provide a counterweight to politicians’ tendency to buy votes with other people’s money”.  Does that sound Tea Party-ish to you? It does to me.
His sentiments are a reaction to what insurers refer to as moral hazard.  Politicians are inclined to take more risk with taxpayer money because spending increases their pleasure (chances of re-election) more than the pain of the bills they incur.  After all the bills could be pushed into the future seemingly forever. 
Professor Vermaelen’s comments trigger a second thought, this one a mere synaptic stroll: politicians often do not represent their constituents well. Economists refer to this as the agency problem. 
People (taxpayers or stockholders) may think they’ve hired an agent (politicians or management) to carry out their instructions faithfully. But the agent has his or her own personal goals that often conflict with their employer.  Those personal goals get in the way.  Hence, in the political case, runaway spending results.
And this leads to a third closely related point: government has its own economic interests separate from its citizens.  When those interests are not perfectly aligned, government pursues its objectives first. Citizens are treated as neglectable supplicants.
Read Professor Theo Vermaelen’s piece. http://online.wsj.com/article/SB10001424052970204903804577082493104507200.html?mod=opinion_newsreel

Fix the National Debt 1

By gosh, do it your way.  Spend a few quick seconds on this first-of-a-series.  
We’ve built a website to help you design the government you want.  Deficits. Debt. Taxes. Government Spending. It’s your money.
Before you know it, you will have designed a better government budget than your elected representatives.  AND we’ll get your instructions to them.

Click here to Fix the National Debt.  Oh, and click the “Open Notes” link first when the page opens.

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