Americans Choose Greater Depression

It has been interesting watching and listening to the commentary on the US budget stand-off, which has been resolved, at least for another few months. Democrats and Republicans have blamed each other, naturally enough, and the overwhelmingly left-wing mainstream media have blamed the Republicans, also naturally enough. But an interesting fact arose during the debate, which the media did not play up because it shows perhaps where the weight of blame really lies.  The US Senate has not passed a budget resolution since 2009.  Every budget appropriation bill since then has been what is called a "continuing resolution," in effect an emergency measure to keep the government running for a short period, as indeed is the case with the latest funding bill (which only funds the government until January 2014).  

The real blame for the lack of a proper budget does not lie with Congress, however.  The reason there has not been a proper budget bill since 2009 is that President Obama's Office of Management and Budget has not proposed one.  The United States follows the procedures of its Westminister origins in the executive branch putting up a budget, which the legislative branch votes on. So you can't blame the Republican-controlled House of Representatives or the Democrat-controlled Senate for failing to pass a budget, because there hasn't been one to vote on for the last four years.  The blame lies fairly and squarely with President Obama.  This article, from the (liberal, pro-Obama) Washington Post, tells why.

Irrespective of the blame, there is a lack of political will to address what is actually an expenditure crisis.  The US Government spends around a third more every year than its takes in revenue and without expenditure cuts, massive tax increases, or a significant surge in economic growth, this will continue to grow.  The federal debt stood at a little over $10 trillion when President Obama took office and he has now increased it by two-thirds to over $17 trillion.  It will almost certainly have doubled by the time he leaves office in 2017. Democrats say George W Bush was just as bad but this is not true - the debt rose 38% under Bush (and 34% under Clinton).  

How is the US federal debt funded?  For the most part, new debt is funded by issuing Treasury Bonds. Who buys the Treasuries?  Well, last year 70% of them were bought by the Federal Reserve. And where does the Federal Reserve gets its funds from?  It creates the money out of thin air through entries in its accounting systems. This is the modern-day equivalent of rolling the printing presses to create more money. We all know what happens when you do that - there are plenty of examples such as Germany in the 1920s and Zimbabwe in recent years.

So why is the US not suffering from hyperinflation? The answer is twofold.  Firstly, actual inflation is not as low as the US Government claims it to be.  If we use the same methodology to calculate inflation as in 1980, current US inflation would be nearly 10% rather than the official rate of 1.5%. Secondly, prices are being held down by a combination of consumer behaviour, which is to pay off debt rather than increase spending, plus artificially low interest rates (ordinarily the latter would discourage the former).  Interest rates are being held down by precisely the situation discussed above - the Federal Reserve buying Treasury Bonds at the low interest rates.  The reason the Federal Reserve is buying most of the T-bonds is that no one else will take them at such low rates.  Chinese investors, for example, who were the main purchasers of T-Bonds up until a couple of years ago, are no longer interested in buying them at the current coupon rate of 1.9% because they believe the risk premium is a lot higher than that.  To get some idea of how the market views the risk of US government bonds, one only has to look at the longer term yields, which are up to 4%.

The US Government can get away with this 'borrowing from Peter to pay Paul' scenario just as long as the US Dollar continues to be regarded as the world's primary exchange currency.  In other words, it can continue to 'print' Dollars to lend to itself because other countries still regard the Dollar as sound. But under this scenario the US Dollar must start to fall, as indeed it is has been doing for the last few years against more stable currencies such as the New Zealand Dollar.  Many commentators believe there will come a tipping point at which confidence in the US Dollar will be eroded sufficiently to see it plummet, and when that happens US inflation will rise and US interest rates will soar.  Of course, that will mean the US deficit will increase even further as the interest on Federal debt rises and the whole vicious circle will send the US economy back into significant decline, a scenario that some commentators are calling the 'Greater Depression'.

The US is unlikely to grow its way out of its current economic situation through more of the same policies. Government borrowing to drive consumer spending has not worked. The alternative is encourage greater capital investment to grow production, jobs and incomes, and the way to do this is to lower taxes, reduce disincentives to investment such as government regulations, and to significantly decrease government spending to balance the Federal budget. Unfortunately, we have a socialist in the White House, who would rather see his country suffer further economic decline rather than free up the economy.  A proper budget that showed the true state of the government's finances, would be a good start.

Wellington voters choose economic decline

The New Zealand local body election results are in, and here in Wellington we now have a slew of Green Party councillors on the city and regional councils as well as our Green mayor re-elected.  This is not entirely surprising. Wellington is the capital and many of its workforce are public servants.  They tend to hold left-wing political views and unsurprising support more government in the lives of citizens, not less.  The Green Party is, like most similar political groups worldwide, hard-left on economic matters.

Wellington as an economic centre is dying.  Even our Prime Minister, John Key, a man you would think would be sensitive to making such criticism of his seat of government, recently said so.  Wellington's problems started in the 1980s with the decline of its manufacturing base due to the (much-needed) reforms of the Lange-Douglas Government including the removal of protectionist trade policies.  The trend was exacerbated with a significant migration of corporate head offices and supporting service businesses to Auckland.   

The economic decline of the capital was disguised throughout the term of the Clark Labour Government in the 2000s because of the vast expansion of the public service with core employees increasing by about 40%. The majority of the increase was in Wellington and the spending of these public sector employees in the region drove up economic activity (and most notably property prices) during the nine years Labour was in power.  The Key National Government has stopped the expansion by limiting departmental budget increases and has even required some retrenchment of numbers.  This has meant Wellington's non-public-sector decline cannot be disguised any longer.

The Greens' policies, which are about socialistic redistribution of wealth and increasing compliance costs for development in pursuit of their environment agenda, are not likely to help matters.  Wellington can't afford the profligate, anti-growth economic policies of the Greens.  The city needs new businesses to generate employment and wealth to stem the decline of the past three decades.  The Greens offer only offer more economic blood-letting at a time when the patient needs vitamins.

If you want an example of what can happen at a local level after years of ill-advised policies you only need look at Detroit - a city that, like Wellington, once had the highest per capita income of any in the country, which has now filed for bankruptcy.  If Wellington is to avoid becoming another Detroit, its voters are going to have to choose politicians who value economic growth over fanciful socialist and environmental aims. Unfortunately I hold out little prospect of the capital's large public employee electorate making such a choice.

1984 is coming

I'm going through a George Orwell phase at the moment, rediscovering his books that I first read as a high school student. Perhaps it is the fact that I am re-reading them with an additional 30 years of experience of the world, or perhaps it is that the world has changed considerably since the first reading, but Orwell's books now resonate with a prescience that they did not back then. 1984, in particular, is scary in its parallels to life in the Western world today.

We have all heard of the comparison of Newspeak, the redacted language of the fictitious state of Oceania, with modern politically-correct language and its euphemistic elimination of any words considered to be insensitive or too permissive (e.g. "differently-abled" for disabled, "Afro-American" for Negro, etc.) But this is the least of the similarities.

The constant electronic surveillance by which Big Brother watches his subjects is reality today.  In the book the surveillance is conducted by the somewhat primitive means of two-way television sets, whereas today it is conducted much more surreptitiously by the likes of the US National Security Agency (which surely would be part of the antonymically named Ministry of Love in the book) simply by demanding all the telephone and internet records of every American be handed over for scrutiny. The fact that the NSA does this it in complete disregard of the law (as indeed did New Zealand's own Government Communications Security Bureau did in the Kim Dotcom case) is, again, portended in the book when the protanganist Winston Smith points out, "nothing was illegal, since there were no longer any laws".

The scariest part of the absolute totalitarianism portrayed in the book is Big Brother's ability to not only rewrite history but to recreate the "truth" by erasing any information that is contrary to its view of the world.  In New Zealand we have an obvious example of this in Treaty of Waitangi settlements for historic Maori grievances that include the government's agreement to issue an official version of the historical facts in issue that suit the claimants' version of events.  Government bureaucrats decide what history should be and then attempt to create an accepted version.  Anyone who tries to maintain a contrary version is branded a racist, just as in 1984 anyone who contradicts the official version of events is guilty of thoughtcrime.

Fortunately, we still live in a world that is at worst a very diluted version of 1984, but the trend in most Western countries is very much towards a more concentrated version of Orwell's distopia.