Forerunner

The Budget Explained in Simple English

Downward Wisconsin

We used to make things here in Wisconsin.

We made machine tools in Milwaukee, cars in Kenosha and ships in Sheboygan. We mined iron in the north and lead in the south. We made cheese, we made brats, we made beer, and we even made napkins to clean up what we spilled. And we made money.

The original war on poverty was a private, mercenary affair. Men like Harnishfeger, Allis, Chalmers, Kohler, Kearney, Trecker, Modine, Case, Mead, Falk, Allen, Bradley, Cutler, Hammer, Bucyrus, Harley, Davidson, Pabst, and Miller lifted millions up from subsistence living to middle class comfort. They did it - not "Fighting Bob" La Follette or any of the politicians who came along later to take the credit and rake a piece of the action through the steepest progressive scheme in the nation.

Those old geezers with the beards cured poverty by putting people to work. Generations of Wisconsinites learned trades and mastered them in the factories, breweries, mills, foundries, and shipyards those capitalists built with their hands. Thousands of small businesses supplied these industrial giants, and tens of thousands of proprietors and professionals provided all of the services that all those other families needed to live well. The wealth got spread around plenty.

The profits generated by our great industrialists funded charities, the arts, education, libraries, museums, parks, and community development associations. Taxes on their profits, property, and payrolls built our schools, roads, bridges, and the safety net that Wisconsin's progressives are still taking credit for, as if the money came from their council meetings. The offering plates in churches of every denomination were filled with money left over from company paychecks that were made possible because a few bold young men risked it all and got rich. Don’t thank God for them; thank them that you learned about God.

Their wealth pales in comparison to the wealth they created for millions and millions of other Wisconsin families. Those with an appreciation for the immeasurable contributions of Wisconsin's industrial icons of 1910 will find the list of Wisconsin's top ten employers of 2010 appalling:

Walmart, University of Wisconsin-Madison, Milwaukee Public Schools, U.S. Postal Service, Wisconsin Department of Corrections, Menards, Marshfield Clinic, Aurora Health Care, City of Milwaukee, and Wisconsin Department of Veterans Affairs.

This is what a century of progressivism will get you. Wisconsin is the birthplace of the progressive movement, the home of the Socialist Party, the first state to allow public sector unions, the cradle of environmental activism, a liberal fortress walled off against common sense for decades. Their motto, Forward Wisconsin, should be changed to Downward Wisconsin if truth in advertising applies to slogans.

There is no shortage of activists, advocates, and agitators in this State. If government were the answer to our problems, we would have no problems. The very same people  or people just like them who picketed, struck, sued, taxed, and regulated our great companies out of this state are now complaining about the unemployment and poverty that they have brought upon themselves. They got rid of those old rich white guys and replaced them with nothing.

Wisconsin ranks 47th in the rate of new business formation. We are one of the worst states for native college graduate exodus; our brightest and most ambitions graduates leave to seek their fortunes elsewhere. Why shouldn't they? Our tax rates are among the worst in the nation and our business climate, perpetually in the bottom of the rankings, has only recently moved up thanks to a Governor who now faces a recall for his trouble.

In 1970, the new environmental movement joined unions and socialists in a coordinated effort to demonize industry. When I was in college, the ranting against "polluting profiteers" was like white noise, always there. They won, and here is the price of their victory: in 1970, manufacturers paid 18.2% of Wisconsin's property taxes, the major source of school funding - and in 2010 those who remained paid 3.7%.

So who is it that caused the funding crisis in our schools and the skyrocketing tax rates on our homes? It is the same ignoramuses who are sitting on bridges, pooping on things, and passing around recall petitions. The unemployed 26-year old in the hemp hat looking for sympathy might look instead for some inspiration from Jerome I. Case, who started his agricultural equipment business at the age of 21, miraculously without an iPhone 4s.

Mr. Case got rich by asking people what they want and making it for them. He did not get rich by telling people what he wanted and waiting for them to do something about it. If you want to declare war on your own poverty, memorize that.

In the last decade alone we have lost 150,000 manufacturing jobs in this state, over 25%. And it's not just jobs that have been lost; the companies that provided them are gone. Those jobs are not coming back, no matter how long we extend unemployment benefits pretending they are. The 450,000 people who still work in manufacturing in Wisconsin are damn good it at, but we are now outnumbered by people who work for government. A significant number of the latter are tasked with taxing, regulating, and generally harassing the former. While it is true that many manufacturers chased low-wage opportunities on their own, many more were driven out of the state by the increasing cost of doing business here.

It is a myth that unions improve wages. If you consider only the 1,000 jobs in a closed shop, you might think an average union wage is, say, $30/hr. But if you add in the zero wages of the 10,000 jobs lost in companies chased out by union harassment, the average of all 11,000 union workers is reduced to $2.72/hr. Do you know the average wage of union iron miners in this state? Zero. And the left is fighting hard to keep it that way in Northern Wisconsin - looking out for the working man, they call it.

It is also a myth that free trade causes job losses. Over the past three years, U.S. manufacturers sold $70 billion more goods to our Free Trade Agreement (FTA) partners than we bought from them. Conversely, we suffered a $1.3 trillion trade deficit with countries where no FTA's exist. I doubt that kids are going to learn that in our government-union monopoly schools; it doesn't fit the narrative.

No one wants to see another person suffer in poverty, and liberty is the best economic policy there is. The great industrialists of Wisconsin took less than a generation to lift millions up to a life of dignity, pride, prosperity and good will. When enterprise was free and government was limited, we all prospered.

Those great men of industry were not anointed at birth to be rich; they rose from nothing to great wealth through their own hard work and the value they added to their employees and their customers through choice, competition, and voluntary exchange. That is the only sure path to real prosperity; the debt economy is a temporary illusion.

Look again at the list of our famous industrialists and the list of our current employers. Who would you wish your child or grandchild to grow up to be? Who do you think will do more good on this earth?  Jerome I. Case and his tractors, or the Coordinator of Supplier Diversity at MPS.

If you chose MPS, then apply now; that job is open, and it pays up to $72,000 plus benefits and early retirement. Go in peace and save the world. Me, I'm going with the tractor guy.

Moment Of Clarity is a weekly commentary by Libertarian writer and speaker Tim Nerenz, Ph.D. Visit Tim's website www.timnerenz.com to find your moment.

Great Prosperity (1947-77) vs. Great Regression (1981-?)

Monster chart porn from an article titled "The Limping Middle Class" by Robert B. Reich in the Sunday NYT September 3, 2011 via The Big Picture:

Comments by Bill Black at Occupy Wall Street

 

Daniel Hannan - Words of Wisdom

 

Amerika Today

46.2 million Americans are now poor...

22% of children in poverty...

Dramatic drop in median income...

Likely to worsen...

Nassim Taleb: "As An Industry Wall Street Has NOT Suffered And The Fed Is Doing Everything It Can To Finance Their Bonuses"

 

Quote of the Day

“You can ignore reality, but you can’t ignore the consequences of ignoring reality.”

– Ayn Rand

Decade of Stimulus Yields Nothing but Debt

From Bloomberg by Caroline Baum:

When George W. Bush took up residence in the White House in January 2001, total U.S. debt stood at $5.95 trillion. Last week it was $14.3 trillion, with $2.4 trillion freshly authorized by Congress Tuesday.

Ten years and $8.35 trillion later, what do we have to show for this decade of deficit spending? A glut of unoccupied homes, unemployment exceeding 9 percent, a stalled economy and a huge mountain of debt. Real gross domestic product growth averaged 1.6 percent from the first quarter of 2001 through the second quarter of 2011.

It doesn’t sound like a very good trade-off. And now Keynesians are whining about discretionary spending cuts of $21 billion next year? That’s one-half of one percent. And it qualifies as a “cut” only in the fanciful world of government accounting.

The Budget Control Act of 2011 will save $917 billion over 10 years relative to the Congressional Budget Office’s baseline. It leaves the tough work to a bipartisan congressional committee of 12, to be appointed by the leadership in each house. If this supercommittee fails to agree on a minimum of $1.2 trillion of additional savings over 10 years, automatic spending cuts -- evenly divided between defense and nondefense -- will kick in.

Is there any reason to think the same folks who couldn’t agree on a grand bargain this past month will join hands and find commonality in the next three, with one month off for vacation?

Rosy Scenario

Even if the committee agrees on the prescribed savings by Nov. 23 and Congress enacts them by Dec. 23, as required, laws passed today aren’t binding on future congresses.

Throw in the fact that revenue and budget forecasts tend to be overly optimistic, and there’s even less reason to think Congress has put the U.S. on a sound fiscal path.

In a July 2011 working paper for the National Bureau of Economic Research, Harvard economist Jeffrey Frankel identified a pattern of over-optimism in official forecasts, a bias that gets bigger in outer years. (Who can forget the CBO’s 2001 estimate of a 10-year, $5.7 trillion budget surplus?) A fixed budget rule, such as the euro area’s Stability and Growth Pact with its mandated deficit-to-GDP ratios, only exacerbates the tendency.

“Political leaders meet their target by adjusting their forecasts rather than by adjusting their policies,” Frankel writes.

First Installment

The deal hashed out in Washington at the eleventh hour this week does nothing to curb the unsustainable growth of entitlement spending -- on programs such as Medicare, Medicaid and Social Security. Medicare outlays have risen 9 percent a year for the last 30 years in a period of stable demographics, according to Steven Wieting, U.S. economist at Citigroup Inc. The automatic spending cuts outlined in the budget act would limit reductions in Medicare expenditures to no more than 2 percent a year.

By the end of 2012 or start of 2013, the federal government will be back at the trough with a request for additional borrowing authority. The debt will keep rising, and the ratio of publicly held debt to GDP will increase from 62 percent last year to as much as 90 percent in 2021, according to some private estimates, depending on what Congress does about the expiring tax cuts, the Medicare “doc fix” and the alternative minimum tax.

The CBO’s estimate of $2.1 trillion in savings over 10 years is well short of the $4 trillion Standard & Poor’s says is necessary to stabilize the debt and avoid a rating downgrade.

‘Architectural Change’

No matter. Some prominent Keynesians are advocating more spending now for an economy that is sputtering. Alas, there is little appetite in this country, and less in Congress, for more spending in light of the questionable results. A lost decade doesn’t seem like a good return on an $8.35 trillion investment. (For purists, only $6 trillion of the increase was in marketable debt, the kind of good old deficit spending Keynesians love.)

Maybe it’s time to try something new and different. In 2002 I wrote a column titled, “How About Some Tax Reform Along With Tax Relief?”

How about it? Get rid of the loopholes. Better yet, scrap the entire tax code, which would decimate the lobbying industry. Implement a flat tax or a national sales tax. The time has come for what former Treasury Secretary Paul O’Neill calls “architectural change.”

Can the Code

The current tax code is burdensome, inefficient and costly to administer. O’Neill says it costs the Treasury an estimated $800 billion annually, divided equally between administrative costs and uncollected revenue.

Eliminate the corporate and individual income tax, he says, and replace them with a value-added or consumption tax, with tax refundability for lower-income households.

“We should focus the tax system on raising revenue for the things we as a society need,” O’Neill says.

Of course, what society needs is a matter of opinion. Without strong economic growth, the options are more limited, the choices more difficult. Fiscal stimulus can have only a short-term impact. The government taxes or borrows from Peter to pay Paul, reflecting a temporary transfer of resources, nothing more.

What does the nation have to show for chronic short-term thinking and policies like these? Long-term problems and a mountain of debt.

CBO's 2001 Forecast Predicted Negative $2.5 Trillion Net Debt In 2011

From Zero Hedge:

According to the CBO back in 2001, net US indebtedness in 2011 would be negative $2.436 trillion, the ratio of debt held by the public to GDP would be 4.8%, total budget surplus would be $889 billion, and GDP would be $16.9 trillion.

Debt "forecast":

Surplus and GDP "forecast":

Debt forecast chart:

GDP forecast chart:

S&P Official: U.S. Downgrade Was Due in Part to Debt-Ceiling Brawl

From the WSJ:

A top official at rating firm Standard & Poor's said Friday the company's decision to downgrade U.S. government debt for the first time in 70 years was due in part to Washington's political paralysis surrounding raising the debt ceiling.

The "conclusion was pretty much motivated by all of the debate about the raising of the debt ceiling," John Chambers, chairman of S&P's sovereign ratings committee, said in an interview. "It involved a level of brinksmanship greater than what we had expected earlier in the year."

Congress raised the country's $14.29 trillion debt ceiling on Tuesday, just hours before the country could have begun defaulting on some of its obligations. The debt-ceiling talks were delayed so long, and at times became so acrimonious, that it led some to question whether the debt ceiling would be raised or if the U.S. could inch toward default.

S&P on Friday lowered its rating of long-term U.S. debt from AAA to AA+, saying the trajectory of future U.S. debt was unsustainable. It broke from rivals Moody's Investors Service and Fitch Ratings, which have recently upheld their top-notch ratings for U.S. debt despite concerns about future problems.

U.S. government officials on Friday were furious at S&P's move and challenged the methodology the company used to reach their conclusion, saying it was riddled with errors.

Earlier in the day, Obama administration officials discovered a $2 trillion error in S&P's mathematical conclusions. S&P officials huddled after the mistake was uncovered but decided to stand by their rating despite pleas from the Treasury Department to delay any decision for several days. Company officials acknowledged the mistake but didn't believe it was as significant as their counterparts at the Treasury,

The mistake was a technical one, though it would have large implications. It concerned the future ratio of U.S. debt to the size of the economy, with S&P officials projecting a larger share than many experts.

S&P rates the debt of 126 countries, and fewer than 20 were rated AAA before this week. Once a country loses an AAA rating, it can be very hard to win back.

"We've had five governments that have lost their AAA rating and have gotten it back," Mr. Chambers said. "The length of time is between nine and 18 years."

Mr. Chambers wouldn't say whether the decision by S&P officials to downgrade U.S. debt was a unanimous vote by its committee.

Many budget experts have said for years that the U.S.'s fiscal problems, driven in part by an aging population and ballooning health-care costs, were unsustainable and needed to be addressed. S&P warned several weeks ago that it could downgrade U.S. debt if a deficit-reduction plan being negotiated by congressional leaders fell short of a $4 trillion, 10-year package. And the $2.1 trillion to $2.4 trillion deal that was eventually brokered fell far short of earlier goals.

Obama administration officials are likely to argue that S&P shouldn't have based their historic decision on political posturing and wrangling and even a flirt with near-default. Mr. Chambers said the political "settings" of a country are a key factor in S&P decisions, and the messy fight over the debt ceiling could not be ignored. He said it made company officials question whether the U.S. government will be able to seriously tackle its long-term fiscal challenges.

"The kind of debate we've seen over the debt ceiling has made us think the United States is no longer in the top echelon on its political settings," said Mr. Chambers.

The Great Debtpression - The Game

From Power Line:

The entry is a game called “The Great Debtpression.” It was mailed to the Freedom Club’s PO Box. I could hardly believe it when Mike Scholl and I opened the package. I can’t quickly put my hands on the name of the person who created it, but will update when I find it. The game was based loosely on Monopoly and was fully realized, with a printed board, money, cards, and beautiful player tokens. I really can’t imagine how the creator of the game did it. This is a photo of The Great Debtpression laid out on the floor of my library:

It is one of the most impressive pieces of work I’ve ever seen. Here are the rules of the game:

 

Quote of the Day

Gold is the money of kings; silver is the money of gentlemen; barter is the money of peasants; but debt is the money of slaves.

— Norm Franz

Forbes: U.S. Default a Given

From the New American by Charles Scaliger:

According to no less a source than Forbes magazine, a U.S. default is no longer a question of if. It’s when. In a July 23 article, Forbes’ Addison Wiggin warned readers not to get caught holding U.S. dollars when the United States government defaults — again.

Daring to challenge the oft-repeated claim that any U.S. default would be a historic first, Wiggin points out that the United States has in fact defaulted several times in the past, such as when the federal government failed to redeem dollars for gold during the Civil War and the Great Depression. The latter default, when FDR took the United States off the gold standard rather than honor in full debts incurred during World War I and the Roaring Twenties, resulted in the U.S. dollar’s losing about 40 percent of its purchasing power. That default occurred in the context of a worldwide flight from the gold standard (technically, the gold-exchange standard in Europe; England and most of the rest of Europe had abandoned a full gold standard before the war, and never returned to it, substituting for circulating gold coinage the dubious promise to investors and foreign states to redeem currency in gold). And Wiggin might also have mentioned Nixon’s closing of the gold window — the final end to the U.S. gold standard — as a result of our inability to fully service debts incurred to fight the Vietnam War. That little parlor trick turned into roughly a dozen years of recession and stagflation, and is the real starting point of the bubble that led to the ongoing economic collapse. 

We are now in the final stages of what economist Ludwig von Mises termed the “crack-up boom,” with the Fed (and other central banks abroad) printing money frantically to try to stave off the inevitable collapse and hyperinflation. We have been warning about this outcome for several years now, and it is indicative of how dire circumstances have become that the likes of Forbes magazine — not a purveyor of Austrian economics by a long shot — is now frankly acknowledging it.

As for specifics, Wiggins suggests that the U.S. debt situation may actually be worse than Greece’s, because our federal government is so artful at concealing and understating debt:

Greece’s debt-to-GDP ratio is 143%. America’s is officially 97%. But the $14.3 trillion national debt, stacked up against a $14.7 trillion economy, doesn’t tell the whole story. Look at these numbers:

• $14.3 trillion: “official” national debt

• $5 trillion: Amount Uncle Sam is on the hook for Fannie Mae and Freddie Mac

• $62 trillion: Total liabilities and unfunded obligations for Social Security and Medicare

That doesn’t count the black box of bailouts.

We know how much the Federal Reserve doled out in emergency loans: $16.1 trillion between December 1, 2007, and July 21, 2010. We know that because yesterday the Government Accountability Office completed its first-ever audit of the Fed, made possible largely through the persistence of Rep. Ron Paul (R-Texas) making that audit, however incomplete, the law.

What we don’t know is how much of that has been paid back. “We have literally injected about $5.3 trillion,” said Dr. Paul earlier this month during his questioning of Fed chief Ben Bernanke, “and I don't think we got very much for it. The national debt went up $5.1 trillion.”

Leaving aside the sheer wonder of Ron Paul given credence by Forbes, the figures are sobering if not alarming. We are obviously in debt tens of trillions more than the Federal government is willing to admit (after all, if those “unfunded liabilities” such as Social Security are not part of the debt, why is President Obama threatening not to issue Social Security checks without a higher debt ceiling?).

Consider: The amount under contention right now on Capitol Hill is $3 trillion in cuts — alongside a hike in the debt limit. Yet according to Boston University professor Laurence Kotlikoff, cited by Forbes, “The U.S. must cut spending or raise tax revenue by $20 trillion over the next decade, far more than either the president wants or the House Republicans seek.”

The hard reality is that America — both our government and our private sector — is hopelessly addicted to debt. Tens of millions of Americans are dependent on government healthcare, military pensions, government contracts, Social Security, government subsidies, government loans, and on and on. Making the sort of cuts Kotlikoff envisions would mean cutting or eliminating government subsidies and controls in education, housing, agriculture, banking, healthcare, entitlement programs, research grants, and on and on, as well as terminating our feckless warmongering overseas. But doing these things would send millions of students home from universities, force millions more homeowners into foreclosure, send home hundreds of thousands of military personnel and private contractors making money in Iraq and elsewhere, and allow free-market standards to once again hold sway in sectors — such as healthcare — that have been under government control for decades. All of these steps would entail restoration of liberty on a vast scale — a liberty millions of Americans, accustomed to the federal teat, no longer want. “I want the government to cut spending, but I expect to continue to get what’s due to me” — whether entitlements, welfare, subsidies, grants, or a government job — is the final appeal of a bankrupt nation.

All of the foregoing privations will come, of course, but probably not until the issue is forced by the laws of economics. Forbes estimates that the default will come in late 2012 or early 2013, and expects Washington to keep cutting deals and printing money as long as it can. It is a sad commentary on the state of our nation, and particularly our misnamed “political leadership,” that few of us are willing to accept the reality of what is happening. It’s nice that the scales are finally falling off eyes at Forbes, but it may be too little, too late.

A Thousand Pictures Is Worth One Word

From Casey Research:

In spite of constant headlines about debts and deficits, most Americans don’t really believe the U.S. dollar will collapse. From knowledgeable investors who study the markets to those seemingly too busy to worry about such things, most dismiss the idea of the dollar actually going to zero.

History has a message for us: No fiat currency has lasted forever. Eventually, they all fail.

BMG BullionBars recently published a poster featuring pictures of numerous currencies that have gone bust. Some got there quickly, while others took a century or more. Regardless of how long it took, though, the seductive temptations allowed under a fiat monetary system eventually caught up with these governments, and their currencies went poof!

You might suspect this happened only to third world countries. You’d be wrong. There was no discrimination as to the size or perceived stability of a nation’s economy; if the leaders abused their currency, the country paid the price.

As you scroll through the currencies below, you’ll see some long-ago casualties. What’s shocking, though, is how many have occurred in our lifetime. You might count how many currencies have failed since you’ve been born.

So what’s the one word for the “thousand pictures” below? Worthless.

Yugoslavia – 10 billion dinar, 1993

Zaire – 5 million zaires, 1992

Venezuela – 10,000 bolívares, 2002

Ukraine – 10,000 karbovantsiv, 1995

Turkey – 5 million lira, 1997

Russia – 10,000 rubles, 1992

Romania – 50,000 lei, 2001

Central Bank of China – 10,000 CGU, 1947

Peru – 100,000 intis, 1989

Nicaragua – 10 million córdobas, 1990

Hungary – 10 million pengo, 1945

Greece – 25,000 drachmas, 1943

Germany – 1 billion mark, 1923

Georgia – 1 million laris, 1994

France – 5 livres, 1793

Chile – 10,000 pesos, 1975

Brazil – 500 cruzeiros reais, 1993

Bosnia – 100 million dinar, 1993

Bolivia – 5 million pesos bolivianos, 1985

Belarus – 100,000 rubles, 1996

Argentina – 10,000 pesos argentinos, 1985

Angola – 500,000 kwanzas reajustados, 1995

Zimbabwe – 100 trillion dollars, 2006

So, will a similar fate befall the U.S. dollar? The common denominator that led to the downfall of each currency above was the two big Ds: Debts and Deficits.

With that in mind, consider the following:

Morgan Stanley reported in 2009 that there’s “no historical precedent” for an economy that exceeds a 250% debt-to-GDP ratio without experiencing some sort of financial crisis or high inflation. Our total debt now exceeds GDP by roughly 400%.

Investment legend Marc Faber reports that once a country’s payments on debt exceed 30% of tax revenue, the currency is “done for.” On our current path, analyst Michael Murphy projects we’ll hit that figure by October.

Peter Bernholz, the leading expert on hyperinflation, states unequivocally that “hyperinflation is caused by government budget deficits.” This year’s U.S. budget deficit will end up being $1.5 trillion, an amount never before seen in history.

Since the Federal Reserve’s creation in 1913, the dollar has lost 95% of its purchasing power. Our government leaders clearly don’t know how – or don’t wish – to keep the currency strong.

Whether the dollar goes to zero or merely becomes a second-class currency in the global arena, the possibility of the greenback being added to the above list grows every day. And this will lead to serious and painful consequences in our standard of living. While money is only one of many problems we’ll have to deal with, you can protect your assets with the one currency that can’t be debased, devalued, or destroyed by irresponsible leaders.

Don’t be the investor who dismisses this message from history. Use gold (and silver) as your savings vehicle. Any excuse you have now will be meaningless and irrelevant when we enter that fateful period. Make sure you own enough precious metals to make a difference in your portfolio.

Because when it comes to money, worthless is not a fun word.