Posts Tagged ‘quantitative easing’

GENERATIONAL PONZI SCHEME

August 12, 2013

Pretty soon the elephants and donkeys that run the zoo we call the federal government are going to lock horns (tusks? hooves?) again over raising the debt limit. The elephants will make a big show about closing part or all of the zoo down and will eventually cave to the donkeys. We’ve seen it all before.

We, the monkeys, will grin and chitter, as we’ve done before. The government will print more money and borrow the shortfall and the zoo will stay open—for a while.

If it were a one-sided deal, perhaps we could push the debt off forever. After all, we have children, who will presumably have more children, and so on and so forth. Three generations from now, the great-grandchildren can hand off the, say, $170 trillion to their kids. The fly in the ointment, unfortunately, is that we have to have—darn it!—people willing to take our dollars. And a growing number of experts are warning of signs that the tenure of our greenbacks as the world’s reserve currency is coming to a close.

We could reverse course, start living within our means, pen a real budget, tighten our belts and begin the slow, painful road to recovery. But, as we’ve seen with the elephant-donkey wrangling over the sequester, which was simply a reduction in the continued growth of spending, this is not going to happen.

We could, as I’ve pointed out in a previous blog, become the world’s foremost oil producer with our new-found fracking abilities and vast shale oil reserves, continue with out current rate of unbridled spending growth, and perhaps even have enough left over to slowly pay down the debt. This could buy us more than a century of wanton progressivism—perhaps even pay for full-fledged socialism. That assumes our entry into the marketplace doesn’t further destabilize the Middle East, which largely depends on oil as its source of income.

In the meantime, though, we’ll print and borrow for as long as we can.

Generational theft is a crime not punishable by law, only God.

Advertisements

THE GOD OF WASTE

May 19, 2013

A couple of weeks ago I received a report from an out-of-area cardiologist regarding a mutual patient who spends part of the year in another state. The note referenced a 3-year-old cardiovascular test ordered by me with intent to repeat. There was no record of the more recent study done a few months ago, perhaps forgotten by the patient. I contacted the patient only to learn the repeat study has been completed a day earlier.

If you think this unnecessary duplication of effort is an isolated event, think again. It’s just another example of the 20-30% of the waste in the system. An industry characterized by third-party payers and often little to no patient out-of-pocket expense lends itself to this scenario. The insurers don’t have the ability to track all of this, and perhaps lack the incentive as well, as long as they can raise premiums and maintain robust profit margins. Usually the quick fix is employed—the blunt instrument of progressive reductions in reimbursement for the most commonly employed tests and procedures, regardless of their appropriateness or complexity.

If you think this is isolated to the heath care industry, think again. Waste is the new god of Western society. Its worship takes the form of long-term government guarantees of retirement benefits regardless of market conditions, funded by loans and wave after wave of “quantitative easing,” the green ink flowing like a verdant waterfall. The largesse even spills into the private sector, from time to time. When General Motors decided, at the behest of the union leadership, to emulate the government’s modus operandi with unsustainable retirement guarantees in the form of defined benefits, the ruling class stepped in with freshly printed and borrowed money to prevent the inevitable implosion. The move was applauded by many; the alternative would have been near-term hardship on a major scale. The future fall-out from this is … well, in the future.

A majority of the electorate is perfectly happy to allow this state of affairs to continue. Retirement, unemployment and welfare benefits provide comfort, and a reasonable standard of living. It’s also comforting to attribute the current economic malaise to the failure of the wealthy to pay their fair share, rather than indiscriminate borrowing and unbridled printing. Some believe it will all heal when the economy magically recovers. Others don’t think about it at all. The more informed and cynical will try to get whatever they can before the end of the road is reached.

I don’t know how long the road is. Perhaps it ends when our debt-to-GDP ratio reaches 170%, as in Greece. I do know that history, ancient and present, proves that it is not infinite.

So clink your glasses in salute to the new god. Green beer is a one day event—green money is forever. Or is it?

WE THE PEOPLE

January 7, 2013

I caught a snippet of a commentator interviewing a talking head, probably a politico. After lambasting Congress, she asked if he thought, ultimately, that the American people were responsible for the poor shape we’re in. I waited for the usual response, and wasn’t disappointed: No, we can’t blame the folks for the failings of the legislators.

It’s very unpopular (duh) to criticize the electorate, and no politician will cross that line; it’s like signing your own pink slip. But I’m not running for office, so I can afford to state the obvious: We’re a democratic republic, and we elect and re-elect the people who are failing us. Albert Einstein is quoted as saying the definition of insanity is doing the same thing over and over again and expecting different results. I suppose, then, we’re insane.

It’s true that in a country as large as ours with widely disparate views, it’s unfair to paint everyone with one brush. Perhaps a better term would be schizophrenic. It all comes down to the same thing: in the net, as a nation we continue to behave irrationally when it comes to our economic survival.

In the people’s defense, for decades we’ve done the same things with ups and downs and eventual recovery, so one might argue our profligate spending, unbridled borrowing, massive governmental expansion and its attendant “quantitative easing,” works. It’s easy to forget the government, in its protective financial bubble, is now an even larger part of the total economy. The debt and the corresponding interest payments are larger than they’ve ever been. The entitlements are bigger than ever with fewer workers per recipient. Most importantly, the culture has changed from one of deploring government charity to expecting it. But you can put a lot of layers of spackle and paint over a large, sturdy house like the U.S. and keep it looking quite spiffy until the moment the termite-ridden support beams give way.

In the 1980s Carter’s disastrous policies brought him the boot. In 2012, Obama’s ineffectual leadership under even more dire circumstances bought him four more years.

Money, the Prozac of the progressive era, whether you print more of it or steal it from a few wealthy people, ain’t gonna cut it for much longer. We need a good shrink.

Let’s start with the government.

EUPHEMISMS

September 24, 2012

Quantitative easing. It has a nice, soothing quality to it. In its third iteration it has the friendly, familiar nickname, “QE3.” I don’t know who coined the term, but I hope they got paid well. It’s brilliant. Unfortunately, what they paid will certainly be worth less tomorrow than it is today.

It isn’t only the name that’s brilliant. The concept itself shines. What other ploy robs you of your hard-earned money so elegantly, all the while making you feel as if you have more? If they called it by its real name, “inflation,” you’d be furious. So they’re going to “quantitatively ease” you. It’s the equivalent of the king’s executioner twisting the vise screw against your temples and telling you he’s “supporting your aching head.”

Of course, before a major election, it pays to “ease” things a bit. Each injection of cash makes things better, for a while, kicking the can down the ever-shortening road for an ever-briefer euphoric fix. But it’s enough to create the illusion, at least for half the nation’s voters, that the Obama economic plan is making a dent in the failing economy.

Meanwhile, the only dent our enemies in the Middle East see is in our armor. Because an economically weak U.S. is a vulnerable U.S. For those apologists who think we’ve been too big a presence in the world, wait and see what it’s like with someone else (perhaps China?) at the forefront. Not a pretty picture.

That’s not to say we haven’t been as poor a steward of our military resources as we’ve been with every other aspect of the economy. Waste has been a way of life for us. Now it’s payback time. Either we do it or our children and grandchildren will.

Unless our enemies cancel the debtor.

PAPER AND ELECTRONS

December 5, 2011

I was reading a brief opinion piece by Mark Calabria on the housing crisis. In essence, he was decrying the old expedient of trying to “fix” it by writing down mortgage debt in the face of an overabundance of housing brought about by the prior real estate bubble. He states, “the notion that forced mortgage write-downs creates wealth, and hence increases spending, is false. But why let facts get in the way of a blind devotion to theft as a manner of creating wealth?” It got me to thinking about the many artificial aspects of our modern economies.

In biblical times it was simple: There was no intermediary for transactions. Your wealth was determined by your land and possessions; transactions occurred by bartering goods and market forces determined what the price of an ox would be (ten chickens and two sows, the hand of a young maiden, whatever). Wealth, in some fashion, was inextricably tied to production. Of course, as in present times, it was also acquired by plunder (thieves and kings specialized in this approach). Even this was tied to production, albeit forced.

Today things are more complicated. Now we use an intermediary known as currency. This revolutionized trade by simplifying the process of defining value and allowing transactions to occur in a standardized fashion over great distances. It also brought with it new hazards. Chief among them is that a currency’s value is based on consensus and faith. Currency has no intrinsic worth. You can’t eat it, plant it, live in it or use it effectively as a weapon. Even the “gold standard” has no intrinsic value with respect to survival beyond that which we bestow on it for our convenience.—and it’s a *&?!# to cart around. So the government had the bright idea of substituting paper. Now, paper is mobile but does require a bit more of a leap of faith to accept in trade for the sweat of your brow. So the government promised to pay, on demand, gold or silver for the bills it printed. The cash in your pocket or bank account was an IOU, and it kept the government honest—they had to back every dollar. Then Nixon came along and said, “we don’t need no stinking gold—you have the word of the mighty federal government as collateral.” Well, since people rarely exchanged dollars for metal, this seemed like a great idea. No waste of time and effort (and expense) enlarging Fort Knox just to print money which everyone accepted as legal tender anyway. So the silver certificate gave way to the Federal Reserve note. And, with the added bonus of the dollar being accepted internationally as the world’s reserve currency, there was an added bonus: If we needed more, we could simply print it for the price of some wood pulp a and few buckets of ink. Everything was hunky-dory.

All that remained was to decide how much money to print. In the old days, it was intrinsic to the system: no chickens, no deal (unless your reputation could swing an IOU like the feds). Nowadays the government, conveniently, is the arbiter of the money pool as well as its producer. It regulates the money supply based, I imagine, on  arcane formulas based on other arcane formulas that estimate the size of the economy. If done accurately (and we know the government’s watch-word is “precision”), it will reflect the economy’s production. In a perfect system we would expect zero inflation. Unfortunately, we like “things,” and have come to expect them regardless of the annoying constraints of production. So we developed a concept known as “quantitative easing.” It sounds better than “printing more money to cover our flagrant disregard of the budget since we’re already in hock up to our eyeballs.” We’ve been able to get away with this because the world, to this point, accepts the dollar as its reserve currency. But printing more money without commensurate increase in production has a price. In 1914 the dollar’s buying power was about $22. In 1960 it was worth less than seven and a half of today’s dollars. Despite this, the wonders of modern technology have allowed us to live at a higher standard of living, although not as “high on the hog” as we’d like to think, to which our $15 trillion in debt can attest. So far we’ve had a couple of rounds of “quantitative easing” and I’ve heard experts claim it takes about 2 years to feel the impact. Is that little swell out there in the ocean an inflation tsunami on its way?

Having divorced currency from production through paper, we then decided that even that was too cumbersome, and began doing most major transactions electronically. Electrons are very light, take up almost no space, and travel, well, at the speed of electrons. This allows people to push around huge sums of money in an instant. Those least productive members of society who make a living off of buying and selling futures and trying to guess the direction stocks will take can scoop billions from the system without producing a single tangible object. This, it seems to me, the layperson, to create an even larger imbalance in this massive, complex chimera we call the global economy. And now it’s wobbling dangerously off center. So, while the rest of us sit mesmerized or dazed by experts pontificating in an arcane lexicon devised to impose a semblance of order on this teetering artificial monstrosity, our leaders devise foolish plans that fly in the face of logic and basic economic sense, or find themselves unable to do anything at all. But what do I know?

Well, I do know you can’t eat paper and electrons.