Tuesday, June 5, 2012 at 6:00AM Economics Friday, June 1, 2012 at 6:00AM 
Alan Simpson, former Senator and cochair of the Simpson-Bowles deficit commission published a letter to his critics.
To Whom It May Concern:
Erskine Bowles and I thoroughly enjoyed our time on the West Coast and received an excellent reception from folks — at least those who are using their heads and have given up using emotion, fear, guilt or racism to juice up their troops. Your little flyer entitled “Bowles! Simpson! Stop using the deficit as a phony excuse to gut our Social Security!” is one of the phoniest excuses for a “flyer” I have ever seen. You use the faces of young people, who are the ones who are going to get gutted while you continue to push out your blather and drivel. My suggestion to you — an honest one — read the damn report. The Moment of Truth — 67 pages, and then tell me if we’re not doing the right thing with Social Security. What a wretched group of seniors you must be to use the faces of the very people that we are trying to save, while the “greedy geezers” like you use them as a tool and a front for your nefarious bunch of crap. You must feel some sense of shame for shoveling out this bulls**t. Read the latest news from the Social Security Trustees. The Social Security System will not “hit the skids” in 2033 instead of 2036. If you can’t understand all of this you need a pane of glass in your naval so you can see out during the day! Read the report. Get back to me. My address is below.
Another Simpson Looking To Cut SpendingIf you don’t read the report, — as Ebenezer Scrooge said in the Christmas Carol, “Haunt me no longer!”
Best regards,
Alan Simpson
I understand the senator's frustration with the politcal process-and with people who can not do thier mathematics. There is no alternative to cuts, delay of the retirement age, and yes more taxes. He is quite right.
Economics Monday, May 28, 2012 at 6:00AM In the short run the crisis in Europe may be good for America and the value of the dollar. Why could this counter-intuitive result occur? While it is more tradition than reality, the US Dollar is perceived as a safe haven for troubled times.
In Russia for example a lot of people keep their savings in dollars. On my first trip to that country several years ago, there were men who stood outside banks whose sole job was to exchange dollars for rubles, and visa versa, at a slightly better rate than you could get inside the bank. The government cracked down on these entrepreneurs and they are gone now.
But the desire to not rely on the ruble is deep seated. Oddly enough to compensate for this the rate you get for timed deposits in Russia is about 5%. This is highly competitive. If I was a currency speculator, the ruble would be on my short list of potential investments. 5% is pretty good in our current artificially low rate. Last time I checked the ruble was up versus the dollar.
For a period the Euro was preferred to the dollar in Russia. But with the current troubles in Europe I bet this has changed and the dollar is riding high again.
What I am saying is those that are predicting the demise of the dollar are premature by several years. As the old saving goes, in the land of the blind, the one-eyed man is king. America is that one eyed-man. But be careful as Obama has a sharp pointy stick.
This video below disagrees with my suggestion that austerity is needed. I guess from Krugman's perspective I am an austerian, a play on words for the Austrian School of economics.
What this video forgets is that government only has three sources of revenue. It can tax, driving money out of the economy. It can borrow, crowding out other borrowers. Or it can print money, potentially and eventually leading to inflation. None of these are good. Budget cutting needs to be a part of a total package.
A Young Paul KrugmanKrugman is at least honest about what he wants: he wants inflation, he wants money printing. He wants to have his cake and eat it too.
As Krugman's guru once famously said:
In the long run we are all dead. (Lord Maynard Keynes)
He was right about this. It is one of the few things he was correct about. Keynes is dead and we live in his long run.
In the short run I expect the dollar to go up in value. But this cannot last. At some point if current trends continue investors will refuse to buy new government debt or roll over maturing debt. When this happens it will not be pretty.
Friday, May 25, 2012 at 6:00AM 
Greece will leave the Euro. There is no choice really. But there is a level of schizophrenia in the Greek voter—apparently 80% want to stay in the Eurozone. Based on the last election most voters are against austerity. The two positions are not reconcilable without large loans from Germany. They will not lend. It is like the little girl who tells her father, “Give me the pretty moon Daddy.” Hysterical crying will follow. This seems to be the official Greek position.
I do not usually agree with Martin Wolfe, a writer for the Financial Times. His latest article is no exception. But I think he is quite accurate in his portrayal of the consequences of the breakup.
Start with Greece. It is in a doom loop. Unemployment soared from 7 per cent of the labour force in May 2008 to 22 per cent in January 2012, while the unemployment rate of people aged under 25 jumped from 21 per cent to 51 per cent. Worse, despite fiscal austerity and debt restructuring, the International Monetary Fund estimates that gross public debt will be 160 per cent of gross domestic product in 2013, 50 percentage points higher than in 2008. Moreover, the IMF forecasts that the current account deficit – the balance of trade on goods and services – will be more than 7 per cent of GDP this year.
I think this is accurate and inevitable. The rest of the article is a description of the various consequences of the crisis. In my view he is quite accurate. Have a look. (Note that sometimes links to Wall Street Journal or in this case Financial Times is behind a pay or registration wall. You can avoid this wall by Google. In this case Google “Martin Wolfe” and “permanent” and that will get you there. Do not feel guilty, the papers have designed their websites to allow this.)
His conclusion is the main thing I disagree with. What can’t continue won’t continue. In this case the Germans cannot continue to loan Greece money.
Greek exit then would create a choice between big moves to a stronger union and a future of endless crises. It is a choice the dominant creditor nation, Germany, must make – among big steps to integration that horrify many of its people, a future of horrible crises or a horrible break up right now. No good choices exist. But the eurozone must become a stronger union or it will disappear.
It cannot become a stronger union. Will Germans vote to increase their taxes to pay Greek pensions? Really, Mr. Wolfe? Really?
Nigel Farage in the EU parliament said this recently.
He is mostly right. He is underplaying the troubles that are ahead for Greece-but what can’t continue won’t. Throwing good money after bad will make things worse. Yes most banks in Europe will go under, but they are bankrupt already. The sooner we understand that the present cannot continue, and act, the better off we all will be. Yes, Wolfe is right, even if he exaggerates some—the crisis is severe. The worst thing that can be done is continue on toward the cliff.
Monday, May 14, 2012 at 6:00AM David Stockman was a former congressman and head of the budget office under Reagan. He got "taken to the woodshed" when he said that the Reagan budget deficits were not sustainable. Here is what the US economy has been doing since Stockman got in trouble for suggesting that debt is bad.
This chart is from Felix Salmon. Here is what he had to say about the implications of the chart.
From 1970 through the beginning of the crisis in 2008, GDP grew at a pretty steady pace. But the amount of debt required to generate that output just got bigger and bigger — the rate of growth of the credit market was much faster than the rate of growth of GDP. In 1970, GDP was $1 trillion while the credit market was $1.6 trillion: a ratio of 1.6 to 1. By 2000, when GDP reached $10 trillion, the credit market had grown to $28.1 trillion: a ratio of 2.8 to 1. And by mid-2008, when GDP was $14.4 trillion, the credit market was $53.6 trillion. That’s a ratio of 3.7 to 1.
In other words, in order to keep up a steady rate of GDP growth, we had to saddle ourselves with ever more cheap and dangerous debt.
Stockman saw the problem clearly in the 80's. I came on board a little later. That is why I supported Perot in 1992 even though I disagreed with him on many issues. I felt that the debt crisis was the only thing that mattered.
Clinton had the dotcom bubble (caused by excess money chasing investments). So that meant he was able to reduce the deficit. (He did not have a surplus. This was an accounting gimmick. The amount of debt that the government owed went up every year Clinton was president.)
As is always the case the bubble popped, and this led to Bush trying to "push on a string" and by tax cuts and money-printing increase the economy. It worked, but it was temporary—the debt level just kept getting higher and higher. This excess money went into real estate and caused the current crisis.
Stockman's view has not changed. While it would have been relatively easy and painless if we had worked on these issues earlier, we have waited too long and now it will be difficult. If we wait until the latest bubble—government debt—pops, it will be devastating.
David Stockman was recently interviewed for the Gold Report.
The Fed is destroying the capital market by pegging and manipulating the price of money and debt capital. Interest rates signal nothing anymore because they are zero. The yield curve signals nothing anymore because it is totally manipulated by the Fed. The very idea of "Operation Twist" is an abomination.
Capital markets are at the heart of capitalism and they are not working. Savers are being crushed when we desperately need savings. The federal government is borrowing when it is broke. Wall Street is arbitraging the Fed's monetary policy by borrowing overnight money at 10 basis points and investing it in 10-year treasuries at a yield of 200 basis points, capturing the profit and laughing all the way to the bank. The Fed has become a captive of the traders and robots on Wall Street.
I have been predicting that we have 3 to 7 years before investors no longer want government bonds. Stockman agrees:
DS: The U.S. Treasury needs to be in the market for $20B in new issuances every week. When the day comes when there are all offers and no bids, the music will stop. Instead of being able to easily pawn off more borrowing on the markets—say 90 basis points for a 5-year note as at present—they may have to pay hundreds of basis points more. All of a sudden the politicians will run around with their hair on fire, asking, what happened to all the free money?
TGR: What do the politicians have to do next?
DS: They are going to have to eat 30 years’ worth of lies and by the time they are done eating, there will be a lot of mayhem.
As I mentioned last week we are headed for an interesting 2013. Interesting enough than my prediction of 3 to 7 years may be optimistic. Former Senator Simpson, co-chair of the deficit reduction committee, thinks it will happen next year.
Stockman does not know but suggests 2013 will be a difficult year:
TGR: Let's talk about timing. On Dec. 31, the tax cuts expire, defense cuts go into place and we hit the debt ceiling.
DS: That will be a clarifying moment; never before have three such powerful vectors come together at the same time— fiscal triple witching.
First, the debt ceiling will expire around election time, so the government will face another shutdown and it will be politically brutal to assemble a majority in a lame duck session to raise it by the trillions that will be needed. Second, the whole set of tax cuts and credits that have been enacted over the last 10 years total up to $400–500B annually will expire on Dec. 31, so they will hit the economy like a ton of bricks if not extended. Third, you have the sequester on defense spending that was put in last summer as a fallback, which cannot be changed without a majority vote in Congress.
A majority vote in congress—good luck with that!
But yet the call from the establishment is still more debt. It is like the drunk who feels bad every morning with a hangover. As soon as he is up he starts drinking again. Can he continue this for some time? Absolutely. But sooner or later his liver will fail. Then he is dead. We can see the signs of liver failure in the economy. Will the next president stop drinking? Not even if it is a President Romney.
Are you ready for the coming crisis? Most people are not. David Stockman concludes the interview with this happy thought:
How painful will the re-pricing be? I think the public already knows that it will be really terrible. A poll I saw the other day indicated that 25% of people on the verge of retirement think they are in such bad financial shape that they will have to work until age 80. Now, the average life expectancy is 78. People's financial circumstances are so bad that they think they will be working two years after they are dead!
