Random Economic Thoughts

On Saturday Texas Representative Mike Schofield came out to our local Tea Party meeting, talking about the upcoming legislative session, and whatever else was on our minds. He gave an explanation about federal and state economics that made sense to me, and I’d like to share.

Rep. Mike Schofield speaking to us last Saturday
photo: Cypress Texas Tea Party

This is from my notes, so not direct quotes. But he said the federal government ran out of money decades ago. It has no money—so it spends debt. 

This isn’t like you and me, or even the vast majority of states that are required to have a balanced budget. We can spend beyond our ability to repay for a while, but soon we have to tighten our belts or find additional income to repay the debt.

The federal government is far beyond the ability to ever repay, and yet they keep spending. They get away with it in just a couple of ways. One is higher taxes, but you can’t do that indefinitely. People won’t tolerate it, and the economy slows to a crawl or into a recession when government removes so much money from the market.

The other thing they do, which has been their preferred choice lately, is to push programs down to the states. They keep hold of the rules and regulations (so they can take credit for "doing good") but push the bill onto the states.

What is the way out? We can hope that a Trump administration will reverse the trend. Heads of programs can remove requirements (unfunded mandates). Another hope is that new appointments to the Supreme Court will stop ruling those myriad regulations, with laws created by unelected bureaucrats, as unconstitutional.

There is an old view—believed by the democrat party and beyond—that you win the election so you get to do what you want. But we have this document called the Constitution that says otherwise. It’s not about doing what you want; it’s about doing what you’re allowed by the supreme law of the land to do. As for the Supreme Court, you certainly shouldn’t be on the Court if you don’t believe in the Constitution.

Rep. Schofield then talked about the Texas constitution. With a balanced budget requirement, when you cut taxes (and literally cut revenue), you have less money to spend. You can’t expand the size of government.

So when the federal government comes in and mandates a program, it literally cuts what the Texas legislature can do with the state budget.

For example, Medicaid is a cancer on the budget. Of $209.4 billion, $64.2 billion is for this one federal program. All we can do is keep qualifying down to narrow the group.

When you buy into the program, you’re stuck with the terms of the deal. But the federal government can change their part of the deal and still won’t let you out of your requirements. They might provide less federal money. They might stop paying entirely, and you’re still required to provide the program in full—now totally at state expense.

Then they say things like, “Then you’ll need to have an income tax.” They want government to have more control over every citizen’s money, because they think they know better than you how to spend your money.

That brings us to one of the basic principles of the Economic Sphere of the Spherical Model: Who decides what will be done with the fruits of your labors? If you want the benefits of the prosperity hemisphere (north on the sphere), the decider should be the person who did the work to earn the money, not some far distant wielder of power. 

This morning I was listening to the third hour of the Glenn Beck radio show. He was talking with Chris Martenson, of PeakProsperity.com. Glenn asked what we could expect from the Fed this week, and how that would affect us. Martenson responded that they would have to raise rates. And the two discussed why. Eventually they got to talking about imbalances. And Chris Martenson made this assertion:

Chris Martenson of PeakProsperity,com
photo from their website

Chris: These things have all been building for a really long time, Glenn. And I think if we had to, if we wanted to put our finger on something, we would say August 15th, 1971, when the United States abandoned the gold standard for the world—that’s really where all of this started. And these imbalances are enormous now.

Glenn: Well, that’s when we all decided we wanted a life we couldn’t afford. So the United States did that, but we convinced the rest of the world that, we’ll continue to buy your stuff, so that will be good for you. But we all said—all of us—we want more stuff than we can afford if we base our dollar or our currencies on gold. Is that accurate?

Chris: It is, because gold provides a set of restraints that you just can’t get around. And, if you can’t get around those restraints, well, sometimes you get to live beyond your means, but very soon thereafter you have to live below your means. The world kind of collectively said, “We don’t like that below our means part. How can we just forever live above our means?” That’s how these imbalances got started.

And it’s a very human thing, Glenn. We’ve seen this so many times in history, and here we are again.

They discuss the differences between inflation and deflation.

Chris: So, everybody I talk to says, “Look, I like falling prices.”

That’s not what the Fed is targeting when it’s worried about deflation. They have a different thing they’re worried about where prices rising or falling are the symptoms, but the cause is what they’re concerned about. And the cause is either our credit markets are expanding or they’re contracting. When they’re expanding, which is inflation, everything kind of works. Governments can continue to run deficits, and big banks can do crazy dumb things. And it all seems to work out. 

The opposite, though, Glenn, when credit is falling, that’s also known as 2009 in the United States. It is deeply scary. What works in forward doesn’t work at all in reverse. The whole system shudders and threatens to collapse. It’s a really scary moment.…

Remember, the Federal Reserve is not really federal; it’s a private entity. It’s got a charter from the US government, and it operates in a very nice monopoly. But it’s first set of clients, always, is the banks. So if the banking system’s happy and expanding, the Fed’s happy.

Glenn: OK, so they’re not worried about deflation; they’re worried about the bank. But, by doing what they’ve done, they are throwing caution to the wind by printing $7 trillion dollars’ worth of currency. Never been done before in the history of the world. And expecting that hyperinflation won’t happen. How can we have printed that much money and not have the problem of the Weimar Republic? What’s the difference?

There are some discussions, then, about where the printed money has been floating around. Instructive. But we really want to know about that hyperinflation thing looming over us.

Chris: The bubbles always have the same self-reinforcing mental map on the way up. People think it makes sense: “Well the last guy paid $79 million, and I paid $85 million. Surely somebody is going to pay me $100 million for this piece of art.” That’s all self-reinforcing on the way up. And we don’t know why, but eventually there’s a pin that that bubble finds, and when it bursts, then you discover what is the true value of things. And things go down very quickly at that point.

Glenn asks, again, will the bubble burst badly, or are there systems in place to prevent that now?

Chris: Well, you know, if it’s not going to burst, we have to believe in the four most dangerous words in human investing history, which is: This time it’s different.

It’s not different. It’s never different. I’m seeing the exact same psychology, rationalizations, post facto rationalizations that people make.... To me, it’s much easier to understand where we are if you see that we’ve got a very scared set of central planners. They’ve worked themselves into a multi-decade corner. They don’t know what to do. So they print.

 And you can find this story in Roman times; you can find it in the first paper money in China. You can find it all through history. And it boils down to this, Glenn; it’s very simple: humans would much rather take a little risk today, instead of some pain today, in the hopes that things turn out better in the future. We always go down the same path.

I highlighted that. I think it explains a lot. 

But, about that hyperinflation: will we see it, Glenn asks, within the next four years?

Chris: We’re going to see it at some point. It could come at any time. It will happen at some point. And I think that the best quote on this comes from Ludwig von Mises; he’s an Austrian economist. And he said, “There’s no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

This isn’t good news, of course. We probably ought to have some food stored, and have some real assets. I don’t know if gold is the right answer. I don’t know what is the right answer. I guess I’m not here to answer how to mitigate the damage caused by the central planners; I’m here to point out that the central planners never do a better job of controlling the economy than a true free market would do.

If only we could try that for a change.

Doing Business

I’m back. Thanks to my son Political Sphere for contributing with a three-part discussion (Part I, Part II, Part III) on the connection between the law and morality, proving you can’t have one without the other.

During our recent travel, when Mr. Spherical Model and I arrived at our destination, a close relative picked us up at the airport to drive us to Mr. Spherical Model’s mother’s home. We had an interesting conversation in the car (that, in hindsight, I wish I’d recorded so I’d have better details for you). Our driver—I’ll call him Bill—is an entrepreneur, working these past several years on a product related to banking and bank cards.  He started this conversation with, “I’ll never do business in America again.” He’s pursuing alternatives: India, France, Great Britain, Japan, Korea….

He started in America. But this administration’s roadblocks are daunting. They just spent two years working with various US banks, with the banks going through the process of figuring out how to use this product while complying with myriad, endless regulations. Some of these come from the Dodd-Frank legislation, which has expanded in size day-by-day with additional rules—about 15 million words worth. (I found an interesting infographic here.) So, it took banks and their legal and compliance staffs two years to study the product. And as they were nearing a positive decision, suddenly the rules changed yet again. And rather than just trust that all would be well, the banks said they’d have to start the process over based on the new rules. In the meantime, overseas banks are very interested and a lot less limited by spools and spools of government red tape.

This reminds me of something I learned in a college government class concerning the rule of law. One of the basic requirements of law is that it is knowable to those who are subject to it. What we have now is tyranny by bureaucracy, with almost no way to comply completely to arbitrary, everchanging hidden details.

Bill had another example of government interference doing the opposite of helping. Someone he knows in the finance world has a business in which he provides an alternative to high-interest payday loans, using reloadable no-carried-balance credit-type cards. He screens those who use it and makes a specific contract with them. The customers temporarily draw a certain amount of unsecured credit on the card, with the promise to pay back that amount by a set short-term date. If the amount is paid according to the contract, there is no interest charge. If the amount hits the deadline, there is a prompt reminder sent to the customer, who is given till the end of the next business day to get the money paid without any penalty or interest charged. If the payment isn’t made, the relatively high interest rate of 18% kicks in, which is not higher than many payday loans, and only applies if the debt isn’t paid as contracted. And unlike payday loans, there’s no 20% (or whatever) transaction fee. So, for someone who needs short-term credit until known income arrives, this is a much better deal. If the customer defaults, he can no longer reload the card, and the business could write off the loss, so it was minimal risk and a much appreciated service that brought return business and connections for other services the business offered.

But the government didn’t like the idea that a “credit card” could charge 18% interest. So they made a rule that shut down the product altogether. So now, if someone has need of short-term credit, they are subject to the high transaction fee as well as the just-as-high-or-higher interest rate of a payday loan (with the risk of doubling the interest rate if you’re late). So, thanks again for government interference that does exactly the opposite of protecting the consumer.

Is government regulation ever helpful? It’s a question worth considering. The idea that government cares enough to protect us from ourselves is downright frightening, considering their pattern of unintended consequences. I have more to say on government regulation, but I think I’ll save it for a whole separate post.

So, back to the conversation with Bill. He went on about the Federal Reserve. Bill was surprised to learn that I actually knew the Federal Reserve Bank was neither a federal organization nor a bank. Bill said 99% of Americans are clueless. They look at the name and assume it's some sort of federal agency, and maybe a supreme top-of-the-hierarchy bank that holds the country's money. Actually it's a consortium of individuals who set themselves up to control the nation’s money supply, and works in conjunction with similar consortia worldwide. Sort of a sophisticated collaboration of mob bosses. 

Have I mentioned that 1913 was a very bad year? Happy Centennial of the worst year in America’s history! Federal income tax started that year. The Constitution was amended to allow for direct election of senators, eliminating representation for state government interests. President Woodrow Wilson was in the process of implementing “progressive” ideology that would undermine constitutional principles. And the Federal Reserve started that year as well. The story is told in a book called The Creature from Jekyll Island, by G. Edward Griffin. It sounds like an old horror B-movie, but it's actually a different kind of nightmare-inducer. Jekyll Island, along the coast of Georgia, is where the founders of the Federal Reserve met and set in motion their plans.

I’ve been aware of the book for a while, and it’s been on my to-read list. But Bill had a copy he let us borrow during the visit. The book is hefty, but it’s set up so you can do a digest version. Every chapter has a chapter heading of what’s coming, and ends with a one-page summary. If you’ve only got a short time, you can get the gist of what happened by reading headings and summaries, which you can probably do in about an hour.

I’m afraid I have to warn that this book will make your heart heavy. Things are not as our Constitution's founders put in place for our eternal benefit. But if you value truth and knowledge, you probably ought to buck up and digest what you can of this information.