The Other Problem with "Changing Momentum"

In supply chain, there is a phenomenon called the bullwhip effect. Basically, when a company is short on inventory, they order a whole bunch to make up for the shortage irrespective of the amount in route. When the previous order arrives and the new order also arrives, they will have more inventory than they have space for.

Now the company has mountains of inventory and they don't make any orders for a long time. Which means their suppliers have nothing to do for a while. Suddenly, the main company runs out of inventory and they have to place a huge order to their supplier who can't meet the order immediately.

That is the problem with having economic decisions made by political figures who only have a 2, 4, or 6 year time horizon. They make decisions that will help them get reelected, but that are not ideal for encouraging long-term prosperity.

In economics, there is an ideal rate of economic growth. For the US and other mature economies, that rate is about 2.5% to 3.5%. They call that range "Goldilocks" because it is not too hot and not too cold.

There may be some short term gains from all this massive government spending, but once the bullwhip effect reaches the money supply, there will be inflation, people's savings will be harmed, and massive tax hikes will be placed on the rich (who are the only ones who pay taxes anyways).

The Problem with Bushonmics aka Obamanomics

I make no distinction between the way Bush and Obama have handled the economic uncertainty since last fall. They have had the same problem. They have no freaking clue what to do other than throw spaghetti at the wall and hope something sticks. The bank bailout at the end of Bush's term was just a random number plucked out of the air that sounded big enough to do something to help. Obama's pork-laden stimulus bill is no different. They are just copying the "bold experimentation" of the FDR years.

There is a problem with that approach. There is no certainty or consistency in the market. Obama complained last night that banks are not lending money to get businesses going again. There is a reason for that. If I run a bank, and know that the government is heaving loads of cash out the treasury doors, I am not going to lend a penny. Why?

I don't want to lose my money. If I make a loan to a company that gets bailed out, I probably will never see the money again. And Obama will say it is my patriotic duty not to seek redress. I know people who are stepping in where banks won't and making business loans at confiscatory interest rates and earning good money. Provide a service; collect a fee.

Since September the stock market has been in free fall. The major reason for this is uncertainty. No one, not even Obama, knows what Obama will do. As a business leader, my responsibility is to make the best decisions I can with all the information I can gather. There is no telling what load of manure this Congress will drop next, and until these issues are resolved, I can't invest in anything.

This uncertainty keeps private investors out of the stock market and keeps businesses from investing in new equipment which will improve their operations. Millions (of people and dollars) will stay on the sidelines until there is a resolution. I personally will not invest if the government will be taking over my business. Until I know my investment won't be confiscated, I will keep my money where it will be 100% safe, even if inflation costs me some value.

Two More Things on the Stimulus

I would love to see a little more about this, but land speculation has brought down banks forever. Church history makes that clear. The Kirtland Bank fell along with hundreds of other banks in the 1830s.

Adams Smith was right: http://tinyurl.com/c9jyoj

The most important thing is that most debt never stimulates anything. Debt only limits future growth. That is why the Church talks about only borrowing for an education and a home. All other purposes of debt are dangerous. If I borrow money for a TV, I temporarily stimulate the economy, but later resources that could have bought other stuff is instead eaten up by interest payments.

Changing Momentum?

I have been pondering the comments from a friend about the economy. He basically argues that there is a massive downward momentum and the government is the only institution which can change the momentum. I have been uncomfortable about the analysis but couldn't quite decide why (other than the obvious that I don't trust government spending).

The real issue is that there was a bubble and it needed to burst. In recent history, there was a tech stock bubble, a crude oil bubble, a food price bubble (corn, wheat, rice, etc.), a farm land price bubble (this is related to the food bubble), and a housing bubble. I may have missed some, but those are the big ones.

A bubble specifically means that an item is inaccurately valued by the market and it increases in value. Those investors trying to ride the next wave buy, buy, buy. The increase in buyers drives up the price. Prices are determined by the expectations of future gains. Everyone bought houses because they could get cheap money and the value was appreciating.

Whenever there is a bubble, there must be a correction. That is because the market learned that it had made wrong assumptions about the value of the future earnings from an asset. Any attempt to prevent the correction will prolong the downturn.

Looking specifically at the housing bubble, there were several contributing factors.

• Cheap money from abnormally low interest rates (the Fed was fighting inflation without watching other things),
• An increase in the supply of buyers (they were attracted to the quick profits),
• Separating loan origination from the risk of loan default (liar loans came from mortgage agents being paid ONLY for signing up a person for a loan, not their ability to pay it back - people didn't have their income verified),
• Government over-regulation that forced banks to loan money to those they knew wouldn't pay them back (home ownership is viewed as a good thing for society, so they used Fannie Mae, Freddie Mack, and the Community Reinvestment Act to get people in homes their credit worthiness and income didn't justify),
• Congress accepting massive political contributions from the institutions they "regulated" (Chris Dodd, Barney Frank, and others - yeah, no conflict of interest there),
• Financial institutions packaging mortgage-backed-securities as high quality investment vehicles for hedge funds (banks had no way to value the liar loans and the securities only work in a perpetually appreciating housing market - oh, and by the way, there are credit card backed securities too. If the recession is long enough and income decreases enough, people will default on credit card payments just like their mortgages. Then all those financial instruments will have to be written off the balance sheets, too.)

All of that to say that the decrease in asset values is necessary at this point. Government bailouts are just propping up the inaccurate values and prolonging the bubble. The real issue in my view is a debt bubble. And debt makes us slaves to our creditors. This bubble has to burst. Consumers need to live within their means, and government needs to stop borrowing from future generations to buy votes now.

The money to pay for corporate bailouts is either borrowed or printed out of thin air. The obvious problem of this new money is that inflation is next. The last time we had high taxes and inflation was not a time of economic growth in this country.

Every time one of these asset pricing bubbles has burst, economic prosperity was on the other side. The time to bail out this economy would have been about 5 years ago. Now it is too late. This needs to run its course so the world can get back to work.

UPDATE: I added a link above to a New York Times article predicting the bailout of Fannie Mae from back in 1999.

Mortgaging the Future

This comes from Obama's Inauguration speech:

And those of us who manage the public's dollars will be held to account — to spend wisely, reform bad habits, and do our business in the light of day — because only then can we restore the vital trust between a people and their government.

I only have one conclusion watching this stimulus debate. Barack Obama lied. There is no wise spending in this stimulus. There is no reformation of bad habits. There is no business done in the light of day. Not one statement from that part of Obama's inauguration is true.

A few things from Obama's rhetoric gave me hope that he would do good things as president. Instead, he says one thing, and does the exact opposite. Whatever the failings of George W. Bush, at least he was honest. He did all he could to fulfill his campaign promises.

I can't wait to see how many other statements from the Inauguration become void. (That is tongue in cheek. There were good things in the speech, but I am starting to expect that NONE of them will be fulfilled.)

Sign the Petition: nostimulus.com

I just signed this petition to stop the stimulus bill. I left this comment in the comment section:

At the price tag of $230,000 spent for every job created or saved, It would be cheaper to pay people to stay home! I would stay home for years for that kind of money! But since I do work, I won't see one penny of benefit. Where is the economic justice in that? Robin Hood took from the government and gave to the poor. It is not the government's job to take from those who produce something and spread the wealth to those who do nothing.

Twitter

I have joined Twitter. You can follow me at http://twitter.com/cougartex. My Tweets also show up to the right.

Huzzah for the Opposition!

A buddy sent me a message that the Republicans were 8 years too late to the party of fiscal responsibility. That got me thinking that I like the Republicans better as the opposition party. Over the last several years, I have been pretty disgusted with the Republicans and their spending. There is no excuse for the things they have foisted upon the American people. Prescription drugs, farm bills, campaign finance, and others.

You expect the Democrats to do those things (it is what they run on), but that is not why I vote Republican. Bush had Congress for half of his Presidency. Now that Democrats have Congress and the Presidency, the Republicans finally remember their principles and fight wasteful spending. The problem is that they are 6 months too late. The first bailout should not have been passed, at least not with Republican assistance. Let the Democrats own that monstrosity all by themselves.

With Republicans in charge there was no one to stand athwart history yelling "STOP" to the increase in the size of government. Now that the Republican House leadership has rediscovered fiscal responsibility, I may start to be a little more willing to call myself a Republican, instead of just a conservative.

Financial Oversight?

I saw a headline online that said Obama was going to have more financial oversight. That is all well and good, and is probably needed, but the issue no one (in Congress) seems to want to address is who is going to have financial oversight over Congress?

I don't care which party is in power, there is no such thing as self-control. All these irresponsible bailouts Bush did and Obama will expand look like a recipe for disaster. Everyone that looks at them lately has said they won't create a single job and the money won't be spent until 2010, which is after the recession is projected to end anyway. (Conveniently, that is the year Congress will be looking to buy their reelection.)

The simple answer is to NOT spend the bailout money. Other than the Jeb Hersarlings and Jeff Flakes (and a short list of others), no one is fighting this power grab by Congress. (If Obama would fight it, that would be change I could believe in.) There is no way this will not cause massive inflation once this new money spreads around the economy.

The World Turned Upside Down

This is a note I sent to my congressman, Chet Edwards:

I have been hearing lately about the FOCA legislation. I have not heard your position on it, but wanted to express in the strongest terms I can that it must be opposed. I understand that abortion is not likely to be outlawed, and don't think that it should be banned in every situation. However, FOCA is a direct attack on the most innocent in our society. There must be common sense limitations on abortion and FOCA outlaws all of them.

To make a point, I compare it to the closing of the Guantanamo Bay terrorist prison. We disregard the lives of the innocent, but let human debris go free to rejoin al-Qaeda and endanger our troops and our citizens. The world really has turned upside down.

Thoughts on Inauguration Day

I have seen people say they are proud to be Americans for the first time in 8 years. That statement makes me a little queasy. Who the president is has nothing to do with my gratitude for this country. The freedom of speech, religion, and press are the most vital aspects of this country.

Obama said we must start today to "remake America." What will be his template? I will agree that government does not work. If he really ends programs that don't work I will rejoice. If the government really starts doing business in the light of day, it will be a miracle. Obama's greatest obstacle to that will the the Reids, Pelosis, Franks, and the rest of Congress. Like he will stand up to them.

Obama says good things about standing up to terrorists: "We will defeat you." Good. I hope he takes that seriously. "People will judge you for what you can build, not what you can destroy." I like that line.

Obama issues a call to service akin to the sacrifice of those who lie in Arlington Cemetery. I appreciate his words about the Founding.

Overall, I thought it was an ok speech. But for all those people who think all our problems are supposed to be over now, there will be massive disillusionment. Things aren't going to change quickly.

Is America Losing its Soul?

It is interesting to look at the things people think Obama's election means for the future of the country. My biggest worry is that something like universal healthcare will pass. People don't like the results of a relatively free market determining who gets medical treatment, but I don't trust the government to do anything better.

The bigger problem is the cultural implications of the nation wanting universal healthcare. What has happened to the American independent spirit which drives people to pick themselves up by their own bootstraps? If healthcare pases this time, it will be because most Americans want it. That is more troubling than the results to the healthcare system.

Looking to government to solve every little problem is a slippery slope to mediocrity. Just look at all the financial bailouts. There is no way passing out money like this will make any of these businesses successful in the long run. Now any business in trouble will come, hat in hand, to Washington asking for money. They will say they are "too big to fail" or "too many jobs are at risk". That is no way to create innovation and economic growth.

Preach On Brother!

This is one of the reasons I wanted Mitt Romney to do better this cycle. No one makes more sense about the economy that Mitt:

Harvard professor and economist Greg Mankiw points out that recent research confirms that tax cuts have a greater multiplier effect than new spending — more economic bang for the federal buck. We should lower tax rates for middle-income families and eliminate their tax on savings altogether — no tax on interest, dividends or capital gains. Let’s also align our corporate tax rate with those of competing nations. These actions will rapidly expand consumption and investment, and right now, time is of the essence.

The federal government is a black hole. Letting them keep too much money will dampen future economic growth.

Encouraging News From Across the Pond

I found this interesting:

The Tories understand that the only way of reducing the size of the state is to cut the demand for government services by strengthening civil society. They understand, finally, that the Left has lost the war on poverty. And they are rediscovering that conservatism is at its best when politicians support and never supplant the Burkean little platoons of family, voluntary organization, and local school.

Society is only stable when citizens obey the unenforceable. This article seems to indicate that some in Britain are starting to recognize that that can only be cultivated by families.

Senate for Sale and Secret Combinations

I know there is a lot of money in politics, but the governor of Illinois tried to give Obama's vacated Senate seat to the highest bidder. Luckily the rule of law still matters here. In corrupt political systems, there is only one way to get ahead: you play the game. When in Rome...

Thinking internationally, no one can get ahead in Pakistan, Bangladesh, or any other place like that without playing the local game. Which is why reform is so difficult. The only way to get power is to play by the rules. If the rules are corruption and conspiracy that is what you do.

Which is what makes Obama's image so interesting. His groupies consider him a messiah figure. Rush made me laugh today:

Jesus walked on water. Obama apparently walks on a cesspool and is untainted by it.

The thing is, Obama got to the top by playing the game. Once out of Chicago, he shed those who helped him rise up as fast as possible: "That's not the _____ I knew."

Obama choosing Gates says to me that he is playing by slightly different rules to get the same goal. He wants as much power as possible, so he will not do anything too crazy right off. The only Democrat presidents in his memory are Clinton and Carter. I wonder which president he will pattern himself after more closely.

Pleasantly Surprised

I have to admit being pleasantly surprised by the picks Obama has made as he as assembled his cabinet. The people mad at him for choosing Robert Gates to continue as the Secretary of Defense are all the people I want mad about foreign policy. Sec. Gates is beloved here in Aggieland from his time as president of Texas A&M University.

My first time on campus was the week President Bush chose Dr. Gates to be the new SecDef. I was attending my first Midnight Yell at Kyle Field just before the Nebraska game in 2006. Dr. Gates spoke to the students for the last time. They have placed a monument on campus honoring the fight against terrorism. This is the plaque on that monument:

Gadiantons All Around

This is a fascinating take on the recent terrorist bloodbath in India. I don't personally think there will be any good solution to the terrorist problem no matter whose strategy is used. Evil men see a way to get power for themselves. The money quote from that article is this:

Violence in Kashmir, the principal bone of contention between India and Pakistan since 1947, is on the decline...

This is precisely what the terrorists don’t want, of course. It’s the fact that tensions over Kashmir are diminishing that prompted them to attack on the November 28 — just as al-Qaeda blew up Samarra’s Golden Mosque in Iraq back in 2006 in order to keep Shias and Sunnis hating and killing each other. The illusion that formal agreements between peoples and governments — whether between India and Pakistan or Israel and the Palestinian Authority — can somehow defuse the terrorist problem was the among the first casualties in Mumbai. Terrorists see it the other way around: the relaxation of tensions is a problem requiring bloodshed.

Islamic terrorists don’t want justice or respect for their beliefs, or restoration of some imaginary homeland. They want violence and death.

The complaints of the terrorist groups sound a lot like Lamanite and Gadianton complaints from the Book of Mormon (see Mosiah 10:12-17; Alma 54:16-24; and 3 Nephi 3:2-10). The inclusion of descriptions of modern terrorist tactics is just another witness that Joseph Smith - or anyone else in the 1820's - could not have fabricated the Book of Mormon. The only explanation is that Joseph was inspired to translate the writings of ancient prophets.

Book of Mormon Burning Fascists

I just ran across this editorial at NationalReview.com. I hadn't heard about the Book of Mormon being burned and left at the Denver Temple. The money quotes:

a Georgetown University law professor and gay activist who helps draft federal legislation related to sexual orientation, says that, when religious liberty conflicts with gay rights, “I’m having a hard time coming up with any case in which religious liberty should win.”

and

They’ve already burned the Book of Mormon. The First Amendment is next.

Parts of the gay rights movement is quickly approaching modern fascism.

What If Prop 8 Lost?

I was reading this from Orson Scott Card tonight and it prompted the question: What if Prop 8 lost? Citing Helaman 16:20-21, Card had this insight about the "No on 8" crowd:

Their story is that we Mormons somehow oppress them and force them; they claim to be our victims. And yet they are the ones who tried to force us to accept their radical change through judicial edict, rejecting a clear majority vote only a few years before.

How would things look different if Prop 8 were defeated? The first thing would be that the gay movement would be hailing this a huge victory and a repudiation of each member of the coalition for Prop 8. This would be the first electoral victory for the gay movement; all they have now are some court decisions decided by one justice.

With the Prop 8 victory, states are 30/30 in passing marriage amendments for state constitutions. Had this been defeated in California, it would have spread to other states. California has long been a bellwether for laws and regulations soon to be passed in other states.

Another major difference is that the "Yes on 8" crowd would not be illegally protesting in the streets. (Protesting is fine, but most of the early protests were without permits.) There would be no meaningful call to boycott Google and Apple, who both opposed Prop 8. There would be no vandalism against churches who opposed Prop 8. There would not likely be any lawsuits to overturn the democratic process.

Basically, the "No on 8" crowd is doing exactly what they are accusing us of doing. At the same time, they are proving correct the fears of the "Yes on 8" campaign: there have been lots of calls to remove the tax exempt status of churches involved.

Liberty and Security

I have often heard this little quote from Benjamin Franklin:

They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety.

Many who opposed President Bush's actions in the War on Terror loved that quote. They cite problems with the Patriot Act, wiretapping, and a host of other issues. The thing is, there is another way to consider that quote.

What kinds of liberty will we be giving up if there is nationalized healthcare? What about the massive government bailouts for a host of industries? Are there other problems coming which will cause people to turn to the government for solutions? My observation is that any time the government tries to solve a problem, it causes more.

If there is no incentive to work, there will be no prosperity. Individuals may worry about the cost of healthcare, job security, or anything else, but giving up liberty to get safety is a dangerous path. The intrusion of government into every aspect of life is accelerating at a breakneck pace. If this recession gets too deep, there will be a wave of sentiment to have government bail out more industries, individuals, and then everyone will be on the government dole.

Then we will have neither prosperity nor safety, and Ben Franklin will be proven correct: They who give up liberty to obtain safety, will lose both liberty and safety.