On the Tuscon Tragedy

There is no shortage of discussion to be found on the sad events of this past Saturday. I feel no obligation to contribute to the discourse, but I do want to provide a few thoughts.

Before I begin, I want to humbly express my own deep sadness and concern over the events of the weekend. What happened was nothing short of a tragedy and nothing I say changes that fact.

The thought that this event would quell the shrill voices which perpetuate the left versus right spectacle has sadly, but not surprisingly, proved to be a dream. Many of those who have attempted to use this opportunity to ask for reflective thought have quickly turned such a plea to a bully pulpit to advance their own, not-so-veiled, rhetoric. This is not shocking. This is the world we live in. And this tragedy does not appear to be the unifying event which will galvanize the masses for good.

Now, I did not watch President Obama's speech tonight (I have the CSPAN replay running right now), but I heard via Twitter that it was very good and delivered the "right" tone. That is encouraging, but I expect it to last about 15 seconds. In fact, in channel surfing to MSNBC (note that I very rarely watch FOX News), the focus has not shifted very much from the "blame Sarah Palin" and "take away the guns" message.

There are a few other things that I think we need to put into perspective. While it is despicable that any human being is targeted for an assassination attempt, we must remember that murder and other heinous crimes happen everyday to "normal" human beings. I believe that all life is precious. I believe that all men are created equal. Six people were killed on Saturday and more than a dozen more were injured in the shooting. There is so much focus on this tragedy because of the involvement of Rep. Gabrielle Giffords. There have been six homicides in Indianapolis so far this year, yet we hear very little about these individuals.

The very fact that we focus on the celebrity of our elected officials has an integrated effect on the heated partisan rivalry. It's a viscous cycle which is continually reinforced. The stakes will get higher and higher until they collapse due to the false weight that is placed upon the perceived importance of our elected officials and the propaganda that drives our political conversation. If we want to depart from the nasty politics that so many complain about, we must reject the power that we've allowed the state to absorb and the status that we've anointed to our politicians.

There is a whole other conversation to be had on Jared Loughner. I don't want to dwell on him for a variety of reasons. We should be careful, though, in using the broad strokes of "crazy", "mentally ill", "disturbed" and the like. Loughner, it appears to me, was quite calculated in this act. He no doubt had issues with society. His acts on Saturday are inexcusable and justice awaits him. However, those who question authority and do not fit in nicely with the stereotype of humanity should not be written off as ill.

We should not use the fact that this young man was concerned about the direction of our society and had an inability to express such concerns in a socially normal manner to, in any way, excuse, justify, or explain his actions.

And Now It's Time for a Breakdown

Cue En Vouge:

Never gonna get it,
Never gonna get it,
Never gonna get it,
Never gonna get it,
Never gonna get it,
Never gonna get it,
Never gonna get it,

Woo, woo, woo, woo!

That is my message to all of you out there who supported the Republicans this last election and thought they would make a material change to reduce the federal deficit. You're never gonna get it!

All references to 90's R&B groups aside, let's take a serious look at this. We are about ready to have a showdown on the debt ceiling. As of yesterday, January 6, 2010, the federal debt subject to the debt ceiling was just shy of $14T. The current ceiling is $14.294T and we will reach that figure sometime between March and May this year. The date cannot be exactly determined because day-to-day receipts and expenditures are not fixed - just like your own budget. (See this entry from 2009 to get a little more detail on short-term Treasury securities.) But, the showdown is coming; there is no doubt about that.

Now, many fiscal conservatives want to see material cuts in the budget. I'd also venture to guess your average Tea Party Republican is squarely opposed to raising the debt ceiling. These GOP supporters are going to be very disappointed when their House leadership (not to mention, and I'm guessing here, all but a handful of GOP Senators) votes to raise the debt ceiling. It is inevitable and what we'll hear is a bunch of lip service that they've made some sort of grand compromise to get us on the right track.

But, let's face it. All it will be is lip service. Let's take a look at the budget and a realistic scenario of what we might expect the GOP to offer as well as a theoretical balanced budget provided by yours truly.

To start, we take a look at a summary of the budget. We all know that budget deficits have exploded beginning in fiscal year 2009. It should be noted that this is a George W. Bush budget and not an Obama budget.

Next, we look at the growth of the total public debt and that which is subject to the debt ceiling. It is clear that we will reach the current ceiling soon. On a basic trendline forecast, it will happen in March.

So, what actually makes up the federal budget from an expenditure point of view? The next table details the key categories and shows the actual figures from 2004 (fiscal year) through the current projection for 2013 based on Obama's 2011 budget. You can see the details of the explosive growth and also note the key expense categories: Social Security, Defense, Medicare, Interest on Debt, and Medicaid. Those five categories typically make up two-thirds of the federal budget.

Source: http://www.gpoaccess.gov/usbudget/fy11/index.html

What is the GOP likely to offer? As I said earlier, 2011 is going to be a lost cause. Looking at 2012, I've laid out a generous GOP budget offer as well as my own budget proposal. For the Republican budget, I've made the following assumptions (which I think are a best case scenario):

• Social Security and Medicare spending stay flat at 2011 levels (4% and 2% respective decreases versus current estimate)
• 10% decrease versus proposed 2012 spending levels for Medicaid, Food/Nutrition, and other mandatory spending
• No change in spending versus proposed 2012 levels for Defense, Interest payments, Veteran's Benefits and Federal Employee Pensions and Disability payments
• A return to 2008 spending levels for Unemployment Benefits and non-Defense Discretionary spending (45% and 16% decreases versus proposed 2012)

This scenario would lead to a $3.5T budget. If there are no changes in total federal revenues (i.e. no tax increases or significant growth in GDP), this would still leave a budget deficit of over $500B. In fact, it would only reduce the deficit by 29% which means the debt ceiling would need to be raised by over one trillion dollars from its existing level to get us to October 30, 2012 (right before the elections).

Think about that. Even if the GOP brings its "A" game, I think it's hard to imagine a scenario where they do not have to vote to raise the debt ceiling by over (I'll say it again) one trillion dollars even before we reach the lame duck session of 2012.

Hey Tea Party folks... I think it's time you take a look at the Libertarian Party.

For those of you who are not Tea Partiers... please recognize the current path is unsustainable. We need to dramatically cut the size and scope of the federal government. You should also be looking at the LP!

The Big Tax Cut Debate

In a shocking turn of events, the federal government has voted to maintain the status quo. That is, of course, sarcasm as the feds have an amazing track record of kicking the can. The "irresponsible" Bush tax cuts have been extended based on a deal cut by the Obama administration with the Congressional Republicans. In addition, unemployment benefits have been extended yet again.

This debate has been somewhat of a false debate. The Bush tax cuts were passed in 2001 with a provision to expire at the end of 2010. Rates would then return to the levels which prevailed during the Clinton administration. The debate and rhetoric on this issue have allowed Washington to shine at its finest.

Take, for example, Rep. John Shadegg (R-AZ) a couple weeks ago on MSNBC's Morning Joe. Shadegg makes two incredulous claims all-too-typical from partisan Republicans.

Of course Republicans don't want to tax the job creators, because that will bring revenue down... Ah, your answer is that spending money drives the economy, and I don't think that's right. It's the creation of jobs that drives the economy. The truth is, that the unemployed will spend as little of that money as they possibly can... Do we want... to continue to ignore the issue of jobs and increase taxes?

In the quote above, Shadegg attempts to make the case that, first, spending doesn't "drive the economy".
Well, unfortunately, that is incorrect. As much as supply-side economists wish to think otherwise, an economy requires spending. If no one is purchasing goods or services, then there are no jobs. Spending (i.e. demand) necessitates the availability and provision of goods and services - which, in turn, requires jobs.Without debating the merits of government-provided unemployment benefits, you cannot dispute that those checks drive spending. While that spending may not "create" jobs, it most certainly helps maintain the status quo and, at least, "saves" jobs.

The second key fallacy in Shadegg's nonsense is his suggestion that raising taxes means less revenue for the government. This assertion is an implicit reference to the Laffer curve, a concept in tax policy. The curve, named after economist Arthur Laffer, suggests that there is a tax rate somewhere between 0% and 100% which maximizes tax revenues. I could get into a lot of math and show some graphs to discuss this, but, on the surface it should be obvious. With a 0% tax rate, there is clearly no tax revenue. It is also suggested, but not empirically proven, that a 100% tax rate yields no revenue since the economy would go completely underground if no income was retained. This makes sense. Obviously there must be an optimal rate somewhere in between.

The Republicans, and far too many fiscal conservatives, always seem to assert that any increase in the tax rate would decrease revenues. This implies that we are already on the downward slope of the curve leading towards the 100% tax rate. A look at the real data (at least from the last two decades) would not suggest such a fact.

Source: IRS. Data in thousands of nominal USD.

Source: IRS.

The table above shows a history of net taxable income by year and total net income tax receipts. The effective rate is the simple percentage calculated between the two. This reflects the net effective tax rate in the U.S. after we account for all the deductions, credits, marginal rates, etc. In the graph immediately above, we look at the relationship between these effective rates and total receipts (now expressed in millions of dollars and adjusted for inflation). There is no clear pattern which suggests that it is impossible to conclude anything of substance from the so-called Laffer curve based on today's tax policy and macroeconomic conditions.

I must make one very important point: this does not qualify as my endorsement for higher tax rates. I personally would have voted against the deal to extend the tax cuts in the absence of massive spending cuts. Today's taxpayers are responsible for electing the officials we have setting the budget today. It is irresponsible to create a larger deficit, increase the national debt, and put our currency at risk for the next generation. It's time that our representatives take a stand to remove our structural deficit issues.

Status Update

It's been several months since my last substantive post and a while longer since I posted with any frequency. There's been a lot going on!

Last time I posted, I had indicated that I would be serving as campaign manager for Mike Wherry, who ran for Secretary of State of Indiana for the Libertarian Party. I spent about three months in that capacity before I resigned. It was a lot of work and a lot of late hours. After a few weeks of hiatus, I again increased my focus on the 2010 elections by supporting the Senate bid of Rebecca Sink-Burris and helping to organize electioneering activities for the Libertarian Party of Marion County.

I have become increasingly involved in LP politics and plan to continue to do so. I have no desire to support the establishment political parties and feel that I've been able to make a difference in the local LP. It is also clear to me that political activism is a necessary tool in the fight for political causes - in my case, liberty, opposition to government tyranny, and corporatism.

So, it is time to rekindle my writing to create awareness, provide analysis, and educate readers on the causes that I care about. I have not yet decided on the mix of content that I will pursue; this will probably evolve. I will talk about issues here in Indianapolis with increased frequency as well as statewide issues. I will not completely abandon issues of global economics, geopolitics and U.S. policy, but the mix will change.

I thank everyone for reading. I've also set up a Page on Facebook ("Like" me) and a Twitter feed ("Follow" me) to expand distribution and content.

Coming Back Soon...

We will resume our (not-so-) regularly scheduled blogging soon.

Latest News

Folks, my limited blogging on this site is likely going to continue. I am going to be the campaign manager for Mike Wherry who is the likely nominee for Indiana Secretary of State for the Libertarian Party. Of course, we will welcome your support since this is the ballot access race in Indiana.

Visit www.mikewherry.com.

The Money Tree

They say that money doesn't grow on trees. That's true. It grows in banks.

I'm not talking about compounding interest either. I'm talking about creation of money right out of thin air. It is well known and understood that the Federal Reserve (and other central banks) print money at will. What's not so well understood is that regular commercial banks essentially do the same thing. To understand this, we have to explore the nature of money, credit, and the modern banking system.

Money can be described in several ways and has a variety of characteristics.We should begin with the Merriam Webster definition: "something generally accepted as a medium of exchange, a measure of value, or a means of payment." In early simple economies, barter was the principle means of exchange. This ultimately evolved to commodity money. Items which had a useful value on their own, are easily transportable, do not lose value or deteriorate, and are reasonably commonplace would serve as commodity money. Over the centuries, metal coins evolved out of being simple commodity money into serving as government issued currency. Generally, the metal coins face value as issued would be equivalent to the metal's value independently. Of course, governments were notorious for devaluing the coins in a variety of ways.

Commodity money gave rise to modern fiat monetary systems. This evolution came to past after many centuries and after the introduction of paper currency. The United States ushered in the new era in 1971 when President Nixon "closed the gold window" removing the last link between the U.S. Dollar and gold. Fiat currency has its value because the government declares it to have value. Essentially, a U.S. Dollar as issued in paper (specifically, a Federal Reserve Note) is a debt of the Federal Reserve backed, not by gold or any commodity, but by a debt obligation of the U.S. Treasury (notwithstanding the other assets which the Fed has added to its balance sheet since the onset of the Global Financial Crisis).

Let's follow the circle: the U.S. Treasury issues debt (bills, notes, or bonds) which is purchased by investors such as large banks; the Federal Reserve buys Treasuries from large banks in return for freshly printed cash; this cash makes its way out to businesses and consumers via transactions with the banks; the money is used to pay taxes going to the coffers of the U.S. Treasury; and, finally, the U.S. Treasury repays the Federal Reserve on its debt obligation ending the circle with the destruction of the currency. This process is how our money derives its value. This complex circuit is important, but it does not tell the entire story. Much of this process is digital. Who pays their taxes by sending paper currency to the IRS? No one. Bank accounts are increased and decreased digitally by computers throughout this entire circuit.

This is where it gets interesting. Throughout this process, the various entities may also use credit as money. When someone uses a credit card or receives a loan, cash is usually not involved in the transaction. And, as most everyone knows, in our system of fractional reserve banking, banks can and do extend credit beyond their cash reserves. The typical example of how this works goes something like this: Joe deposits $1000 with Bank ABC; Bank ABC then lends $900 to Jane maintaining $100 in reserves; Jane spends $900 at the store who deposits the cash with Bank XYZ; Bank XYZ lends $810 to Jack (keeping 10% or $90 in reserves; ... and so on. This process expands the money supply without the issuance of new cash. Jack still has $1000 which he can spend on goods and services. But, Bank XYZ also has $810, and everyone else on down the chain. The size of the reserve requirement will determine how much money is created via bank credit. If the reserve ratio is 10%, then this process would ultimately create $9000 if exhausted completely.

However, this is not how the real world actually works. This is the important part of the story. Banks do not wait to receive deposits before they lend out new money. A bank does not need to physically have $250,000 on hand (in cash or even in assets) to issue a loan of such size on a house. If a bank issues such a loan, they simply need to ensure they meet their reserve requirement which can be done by receiving a loan from another bank. This chain ultimately goes bank to the large privileged banks who can access funds directly from the Federal Reserve. The Fed is ultimately reacting to this credit creation cycle in its operations with these banks (as described above). If you want to read more about how banks defy common wisdom and create credit out of this air, visit George Washington's Blog and read this and this.

We've already established that credit is, in effect, money. It does not behave significantly different than cold hard cash. Many economists and fiscal conservatives have rightly criticized the Fed and its expansionary monetary policy. But, what is lost in the argument is that the private banking system has been expanding credit for decades. They have been free to do so via the implicit rules and policies of a fiat-currency, fractional-reserve system. The implication is that the money supply, and its impact on inflation, must be analyzed from the perspective of credit expansion - not the expansion of the Fed's balance sheet. The Fed has tried desperately to stave off deflation by "printing money" to buy all sort of dubious assets and monetizing the federal deficit. But, this has had little inflationary impact. Why? Banks are still not expanding credit.

Let's analyze this a little deeper. Why are banks not expanding credit? Largely because consumers are not willing to take on more debt. We have hit the wall. We have had our inflation moment. As we pay down debt (or default) and credit is destroyed, we will experience deflationary forces. Admittedly, this is not the whole story. The international perception of the Dollar is still a major factor in the inflation/deflation debate. But, with the financial challenges of Europe, a Japanese economy which has been stagnant for more than a decade, and no other major economies ready to challenge, the Dollar will reign supreme in the interim.

But, there is another problem with all of this. The banks do have a money tree. They have an implicit license to print money. Sure, they cannot literally print money. But, is this still not counterfeit? Is this still not fraud? They make money on this process by collecting interest. I ask my readers to consider this carefully and study the evidence. If the banking system is engaging in a process that is tantamount to counterfeit, what should be done? This is hardly an example of free-market enterprise. The next time that you begin to reflexively defend banks against reform, vilification, and other abuses in the spirit of free-market capitalism, ask yourself if they deserve such a defense or if they are essentially nothing more than a rouge arm of the Federal government.