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Thursday, January 26, 2012

To the Moon, Alice.

Our bridges and roads are crumbling, but Gingrich wants the moon.
The unemployment rate is bumbling, but Gingrich wants the moon.
Our education systems is stumbling, but Gingrich wants the moon.
China's factories are humbling, but Gingrich wants the moon.
Our politics keep fumbling, but Gingrich wants the moon.

Wednesday, January 25, 2012

The US CANNOT Go Bankrupt

I have my disagreements with modern monetary theorists, but one thing I've always agreed and believed is that the US can never really go bankrupt and will not default - it is not Greece.

Listening to Mitch Daniels' Republican response to the State of the Union and talking to friends though, you'd think our "grave" situation is just a day away from our government taking our country into ruin and bankruptcy.

It's just not so folks.  For those of you that want a bit more of a lesson, go here.

But generally,
Companies can go bankrupt, and many do every day.

States, while technically not able to go bankrupt, can 'ruin' their economies very quickly by over-borrowing as they are forced to borrow from private markets much of the time at increasing costs to cover risk.

But countries like the US that 100% controls it's money supply, can NOT go bankrupt and runs no risk of default.  Even politically, if politicians were to force a default, the Fed would undoubtedly work with the Treasury to make sure it didn't happen.   Markets believe that to be the case, and so do I.

Corrections to over-spending means either the country increases taxes (politics), borrows more (with minimal risk to higher interest rates given the way the rest of the world views US currency as a safe haven), or inflates its currency by issuing new money (via Treasury and Fed) that pays for the increase in the spending.

In the first case, if taxes rise (or other spending falls), the debt "problem" can be solved but at significant cost to the economy.  I don't view the second case, and neither do markets, as an issue.  If the country inflates its currency, it may do so but only if the private market allows it to do so.   And, ceteris paribus, there is no reason to suspect that pumping new money into bank reserves would increase loans, as we in fact know that loans happen in reverse.  IE., banks don't make loans based on reserves.  Though the stock of reserves can fluctuate based on loans made.   Loans are made based on present business conditions, credit worthiness etc.   If that doesn't change, loans don't change, and if loans don't change, inflation doesn't change (much).

Look at the world today.  The Fed has pumped million upon millions of dollars into bank reserves....and we have low inflation still today.  Why, because that money just sits there.

Greece meanwhile, having forsaken its own central bank in favor of a united Euro, has lost its connection between its treasury and Fed.  Hence the reason why Greece is different than the US.

Hence the reason why the US is not like Greece.

All this being said, there are still legitimate reasons to want to reduce government spending, not the least of which concern issues I have brought up before regarding moral hazard and inefficiencies and unfairness created via special interests.  Nevertheless, the fact remains the argument on 'bankruptcy' is unfounded.

Hence the reason why the Republican response represents fear-mongering and nothing more.

Friday, January 13, 2012

Cut the government - Let's start with the legislative branch

Very admirable, and long over-due.  But one hopes that this isn't political maneuvering and cutting for cutting's sake, but rather a start to a serious move toward re-organizing the federal government.

Such reorganization can never occur without completely dismantling and re-birthing the legislative branch.  Until that time, corporatism, our limited 2-party system mechanisms of legislation, ridiculous House and Senate 'rules' ... will continue to usher in the further decline of our country.  

Of course, as I've mentioned before, since Obama has to get the legislative branch's 'approval' first, such steps are unlikely to ever happen, and certainly not in my lifetime.

Wednesday, January 11, 2012

States are not like the Federal Government

I think something that is often missed in the political debate of liberal versus conservative is that States are not the same as the federal government.  State-level liberals don't see this so they may sometimes see red if a more conservative Governor wants to reduce certain spending or maintain a balanced budget (many states are required to balance at least part of their budget but not all).  Federal-level conservatives, meanwhile, get upset when their more liberal colleagues don't see the deficit as the most pressing issue.   

States (and local government) are not the same as the federal government.  Both have some ability to borrow, though arguably the smaller the government institution the less able you are to borrow for riskier or longer projects (cities for example don't have the same ability as states which don't have the same power as the US government - at least not without having to pay a good amount of interest on debt).   Another constraint on State borrowing is of course politics.  Both can of course tax and spend.  But, the one thing (and it's a big thing) that State and local government can't (or at least don't) do that the feds can is print and control their own money supply  (not that states/cities don't try). When you control the purse strings, deficits are less of an issue.  It's an alternative to outright borrowing from some other sector.  It's also a practice that is largely still shadowy to the average citizen so it can be done without the same political obstacles.

Contrarily, for states that have limited ability to borrow (politically or otherwise), having a sound financial situation is often prudent since it is not like they can start adding instant dollars to their accounts like the feds can.  This is particularly true during times of economic downturn or economic risk combined with a federal government that is politically more motivated to reduce it's deficit (ie. not aid the states).  A risk averse state in this situation will have little choice but to tighten its purse strings, or else risk turning into an Illinois or California.