Monthly Archives: July 2011

Gridlock Is So Much Better

Paul Krugman has written a broadside against Centrists, like Jeremiah.  Actually, it’s a broadside against Republicans and the Centrists who collaborate with them.  Mr. Krugman’s argument is a straw man.  He attributes to Centrists the imbecile doctrine that “everyone is culpable, therefore no one is culpable.”

He illustrates his point with the example that Republicans are totally wrong in the current fiscal debate, and Democrats are totally right.  Anyone seeking compromise – like the President – is a wimpy Centrist.

The value of a Centrist approach is in public debate, and this example is superb.  Regarding the debt question, how many people will read Krugman’s article and change their minds?  None!  Zero! Democrats already agree with him, and Republican readers were busy drawing horns on his photo.

Jeremiah makes this simple challenge to the pundits of the world.  You must reach people on the other side.  You must make people take a second look at their beliefs.  The “we’re right, they’re wrong” thing isn’t helping.

See also: Fox News Biased?

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Shorting the Dollar

Here is another example of capitalism going underground.  Soros Fund Management is going private.  The fund is estimated to manage around $25 billion – and that’s the last figure we’ll ever hear, because henceforth this money is Soros family private property.  Fund manager George Soros will return roughly $1 billion to outside investors.

This is a familiar story, hedge funds going private to escape Dodd-Frank and SEC scrutiny.  The Reuters article lists several others.  Here’s the disturbing part:

The trades that people will have to conduct in the future in order to make money may not be very politically correct – you may have to short the dollar and do other things that are considered unpatriotic.

Would George Soros, a Democrat and a philanthropist, really short the dollar?  The man who broke the Bank of England?  Never mind the debt ceiling.  Here’s a thought to keep Tim Geithner awake at night.

See also: Capitalism Goes Underground

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Giant Squirting Sound

Last week, during a routine investor call, casino magnate Steve Wynn called President Obama a socialist.  After mincing some words like “weird” and “wet blanket,” Wynn said this:

Obama keeps making speeches about redistribution and maybe we ought to do something to businesses that don’t invest.  We haven’t heard that kind of talk except from pure socialists.

Jeremiah doesn’t believe in labels, and has previously defended the President on this charge.  Still, failed policies are failed policies.  Mr. Wynn went on to praise the pro-business climate in China.  Salon magazine quickly pilloried Wynn, with the usual snarky insults and non sequiturs – completely missing the point.

The point is that a casino costs billions of dollars and creates thousands of jobs.  Mr. Wynn has those billions, and he is creating those jobs in China.  Salon is perhaps unfamiliar with the history of capital flight.

Ross Perot famously ascribed to NAFTA the “giant sucking sound” of jobs moving to Mexico.  Prepare for the whoosh of $billions expelled from America.

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The Fine Print

One of the many calamities attendant on the debt ceiling debate is the imminent loss of America’s AAA credit rating.  If our leaders can’t agree to raise the debt ceiling, rating agencies will lower our credit rating.  Think about that for a minute.  How does America become more creditworthy by taking on more debt?  Jeremiah tried that, and his credit rating only went down.

The rating agencies want to see a plan whereby America is able to make its interest payments.  That’s all our creditors care about.  The real issue is whether investors are willing to buy our bonds and hold our dollars.  The credit rating is just an indicator, and not even a leading indicator.

In the last year, the dollar has lost 25% of its value relative to the Swiss Franc.  In the past few weeks, demand for our bonds has slowed.  This is from a Reuters article, Weak Demand Mars Third Straight Bond Auction:

The $29 billion auction of seven-year notes drew the weakest demand in more than a year, as did a debt auction on Tuesday

If the debt ceiling isn’t raised, the crunch will happen now.  If it is raised, the crunch will happen next month.  The present debate is proof that our leaders in Washington cannot deliver a plan for the debt.  They can’t even deliver a budget on time, much less a balanced budget – or a bipartisan debt plan.

There is a surreal quality to the drama now unfolding in Washington.  A furious struggle is taking place inside this bubble.  Meanwhile, the bond market is calmly backing away.

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Zero-Sum Thinking

Thomas Sowell’s latest article is here.  Sowell writes that lower tax rates can paradoxically increase tax revenue, by stimulating economic growth.  He cites both John F. Kennedy, a Democrat, and Ronald Reagan.  Kennedy famously stimulated growth by cutting taxes, declaring that “a rising tide lifts all boats.”  Especially interesting is Sowell’s observation about the zero-sum mentality:

Those with a zero-sum conception of the economy often show little or no interest in the factors affecting the creation of additional wealth — as distinguished from their preoccupation with the distribution of the current level of wealth.

This echoes Jeremiah’s analogy to the fall of Rome.  But don’t take his word for it.  Read Professor Sowell.

See also:  Books by Thomas Sowell

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Propaganda 101

Good propaganda makes heavy use of images.  Images are easily grasped by the masses.  The term “robber baron” appeals to public prejudice against capitalism.  “Welfare queen” resonates with stereotypes about the poor.  Give the public an easy target, and shift the blame.

Does anyone really believe the public debt can be paid by clamping down on “corporate jet owners?”  Corporate jet owners are, by the way … corporations.  They will have calculated that the savings in time and airfare is worth the expense of running the company jet.  It’s their money.

When Jeremiah hears this stuff, he exclaims “tax the Jews!”  He is mocking, of course, but the rhetoric of class warfare has just about reached that level.  Corporate jet owners would be wise to keep the turbines spinning and some Krugerrands in the hold.

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Promises They Can’t Keep

What do General Motors, Greece, and California all have in common?  Yes, they’re all broke.  More specifically, they all went broke because of unfunded pension obligations.  This is a pernicious moral hazard, especially in government.  It allows politicians to make big promises that come due years later.  Huge promises – about $500 billion, in California.

New Jersey’s $30.7 billion unfunded pension liability makes it the seventh-worst funded system in the country, while the unfunded liability for retiree health benefits is $56.8 billion, according to Moody’s Investors’ Service.

A “defined benefit” pension is nothing more than a promise that the money will be there when you retire.  If you recently retired from General Motors, it wasn’t.  A prudent company will keep track of its pension obligations, and put money aside.  They are required to track how much this money will cover.  Pension funding of 80% is considered good.  That’s for companies.  Governments have lower standards.

If your employer offers a “defined contribution” plan, or puts money into a 401(k), then that money is really there.  Otherwise, you should be very concerned about your funding ratio.  Instead of honest negotiations over wages, management can promise a fat pension and then never fund it.  This moral hazard is even worse in government, because – the workers are also voters!  The politicians will be long gone when the bill comes due.

The solution is to fully fund all pension obligations and charge them against current income, just like wages.  No big promises, no moral hazard.  Now, who do you suppose has the world’s biggest unfunded pension liability?

See also:  Privatize Social Security

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