Will the Dollar's Status Prevent a Slip on a Greecy Slope?

The topic for the last 10 days has been Greece, which then evolves into all the reasons that the US is not like Greece.  The main reason given is that the US can print as many dollars as it wants to, because it’s a reserve currency.  This reason is not only false, it’s dangerously so.  There are limits to how much currency any government can issue before inflation wrecks the economy. It's a long standing tradition for broke governments to pay off by using cheaper metals in coins to issue more of them or printing more money.  The temptation of paying off the government’s debts in cheaper money is so hard to resist that the government wants to believe the risks are less than they actually are.

When money was coins, governments lessened the amount of silver or gold in them and substituted cheaper materials so they could issue more coins. One historical example is that Henry VIII was known as "Old Coppernose" because his early attempts at sandwich coins allowed the copper in the middle to show through when the silver on his nose wore off.  Henry VII only resorted to debasing the coinage towards the very end of his reign.  The chancellors of his son saw the danger and quickly put England back on a sound footing, avoiding a crash.

With paper currency, governments just crank up the presses. In extreme cases, people use wheel barrows full of currency to buy a loaf of bread, like Germany after WWI, or print $100 trillion banknotes like Zimbabwe in 2006-2009.

In modern US terms, we electronically print more money. Calling it quantitative easing doesn't change what's going on. The ultimate result is convenient only in the short term. It wrecks the economy and creates political instability. Hitler would have been trapped in beer halls if it hadn't been for the instability of runaway inflation.

We're already a long way down this road. When I was a kid, gold was fixed at $35 per ounce and silver was fixed at $1.25. A recent gold price was $1,167 and silver was $15.69. The question of how far we can go is as much a matter of the psychology of crowds as it is mathematics. At some point investors are going to calculate the odds of the US returning real value on the bonds and currency issued and decide it's not worth accepting either of them. They won't be fooled by the nominal value of dollars, because they will know about how much inflation to expect. As economist Herbert Stein famously observed, "If something can't go on forever, it won't." 

Keynes was wrong about the benefits of government spending.  If government stimulus worked, Greece would be booming. There is no magic multiplier for money spent by government. Government is uniformly less efficient that private enterprise for the very understandable reason that individual bureaucrats have no incentive to be efficient. The larger their departments are as measured by budgets and personnel, the more power they have. If they improve efficiency, they get budget and personnel cuts as a reward.

If we have learned anything from the Great Depression and the Great Recession, it's that capricious government regulation suppresses economic activity, especially entrepreneurial activity. The hands off recovery under Calvin Coolidge from a steeper recession in 1920 was far superior to the intervention plagued recovery from the 1929 crash. The decreasing regulation of Reagan was much more effective than the increasing regulation of Obama in stimulating growth from comparable recessions.

Some desciples of Keynes say that government debt doesn’t matter because we owe it to ourselves. However, over a third of the federal debt now is held by foreigners. So even in pseudo Keynesian terms, current government policy is ill advised.

If the challenge is inflation, then in my lifetime we've been losing big time. When I was a kid, gold was fixed at $35 per ounce and silver was fixed at $1.25. A recent gold price was $1,167 and silver was $15.69. I used to buy a candy bar for 5 cents and you really could get individual wrapped candy pieces for a penny.

For me the issue isn't whether the federal debt has to be paid off, because it’s true that it really doesn’t have to be completely paid off. The issue is how big the debt service can get before it eats the rest of the budget. Quantitative easing has basically monetized the debt during the Obama years. Interest rates have been held to historic lows which has masked the debt service problem. At some point all of the money spread around with quantitative easing is going to start moving around faster than it has moved since 2009. At that point, inflation will balloon and the Federal Reserve will try to hit the brakes by raising interest rates. When they do, federal debt service will expand roughly $60 - $100 billion for each percentage point the interest rates increase, depending on the maturity structure of short term versus longer term bonds outstanding. This will throw any contemplated budget balancing out the window. 

Quantitative Easing money went into excess reserves, that is reserves larger than what's required to support outstanding bank loans. The liberal assumption that they have to remain reserves forever is false. The other problem with their argument is the tacit assumption that inflation will not increase due to any unexpected shocks in commodity markets. I think this assumption willfully ignores the chaos in the Middle East which could easily drift into a general, perhaps nuclear, war.

The classic explanation of inflation is too much money chasing too few goods.  For me, the explanation of recent low inflation is that the supply of goods and services kept up with the huge increase in the supply of money, at least so far. I think this is due at least partially to increased oil and natural gas production in the US from fracking. Recently, the Saudi Arabian desire to cripple Iran and Russia by forcing low oil prices played a substantial role. If a war in the Middle East disrupts world oil deliveries and the price of oil spikes from $57 a barrel to $130 in a very short time, there will be massive inflation. At that point the Federal Reserve is going to have to sell the bonds they bought during multiple QE programs to tighten the money supply and fight inflation. This will depress bond prices, raise interest rates and torpedo the federal budget.

I view a crisis in the Middle East which impairs oil and gas deliveries as very likely. Liberals may believe that war doesn't solve anything, but Iran, Saudi Arabia, the United Arab Emirates, Syria, Hezbollah, Hamas, Islamic Jihad and ISIS do not agree. (I don't either.)

When discussing inflation, liberals like to talk about how much better the “Lifestyle” of Americans is today.  (They talk out of the other side of their mouths when discussing poverty.)  When you start making "Lifestyle" arguments it usually ends up as nitpicking and semantics. I like to use concrete examples from my own life.  I used to spend my summers on my grandfather's ranch in Montana. We sold it in 1963. I don't think we could afford to rent it for a week now. When we moved from Montana to the Chicago suburbs, my dad bought a house for $64,000. It would go for a million bucks today.

Please note that the rise in real estate values is a rise in current dollar value, not actual value.  The house my Dad bought is still the same house. Only the nominal dollar value has increased. The actual value remains pretty much unchanged. Considering taxes are levied on nominal values, the federal government wins two ways. They pay their debts in cheaper dollars and tax illusionary capital gains. I'm not arguing that the standard of living is stagnant. I am saying that the Federal Reserve is manipulating the money supply to favor the government at the expense of the rest of us.

Whether you got hurt by inflation or not depends on how any assets you own were distributed. It also depends on whether your salary, after taxes, kept up with inflation. If you were trying to save towards retirement, inflation robbed you of the value of your savings. If you bought your house for $1 down in 1986, you came out even or maybe a little ahead. If you work for the government, especially the federal government, no problem. Your wages were adjusted for inflation. Your savings are minimal but you have huge pension benefits that are indexed to inflation and are worth millions in the actuarial present value of the income.

Inflation makes it hard to estimate economic risk because the way it changes values is not uniform across asset classes. To paraphrase Orwell, some assets are more equal than others. When you add the different tax treatment for different assets, it gets worse. In general, inflation diminishes the information value of prices, which in turn reduces efficiency in the economy as a whole. Inflation is not something you wish for. It's something you live through.  If the government takes the inflation to extremes, the economy breaks down, which leads to the government and society breaking down.  Glib talk from liberal pundits is just whistling past the graveyard.

Let's Treat Illegals the Way Mexico Does

I believe we should be every bit as tolerant of illegal aliens as Mexico is in its Constitution. Illegal immigrants in Mexico generally get deported. If foreigners use false documents to get into Mexico, it's a felony and they got to jail. In Mexico, even legally naturalized citizens are barred from almost all government jobs. The Mexican government can deport any foreigner administratively. No judicial finding is required. Foreigners have to register and produce their documents on demand, in Mexico. There is a national population registry in which the Mexican government tracks every person in the country. If you go to Mexico as a tourist, you are given an exit slip to turn in when you leave. If you don't leave on time, Federales start looking for you.

As you read this, you’re thinking we’d need a Constitutional Amendment to treat people this badly.  OK, you're right. We can't be as nasty to illegal aliens as Mexico is because the US Constitution won't allow it. Actually that was my point.  Realistically, we can’t even aspire to their level.  Think about what that says about pro illegal immigration groups with Mexican origins.

Here are some links with extensive quotes from the Mexican Constitution.
http://www.mantecabulletin.com...
http://michellemalkin.com/2013...
http://www.dailykos.com/story/...

Amendment Needed to Check Supreme Court

I think it’s become perfectly clear in the last week that the Supreme Court is abusing its power.  It seems to me that recent decisions of the court are based on what the majority of the justices want the law to be rather than what the law is.  I think that the unchecked power of the Supreme Court has proven to be a design flaw in the Constitution. To return our government to the rule of law instead of the rule of nine appointed judges, I think we need to consider changing the Constitution to check the power of the Supreme Court.  First let me explain why we need to check the Supreme Court.  Then I’ll take a shot at proposing an amendment which I think will help.

I am in favor of gay marriage. If the court had ruled that a legal marriage performed in one state must be recognized in all states, I would have been very happy with the decision. The means Justice Kennedy used instead have badly damaged the outcome. The Supreme Court made it up in both the Obamacare case and the gay marriage case. The whole point of having written laws is that they are predictable. Everyone is supposed to be able to understand what the law is and live by it. Under current circumstances, Supreme Court rulings are more like professional football games. On any given case, the Supreme Court can change the plain meaning of the words in a statute, or the clear understanding of a Constitutional Amendment when it was ratified.

In the Obamacare case, the statute language said subsidies would only go to purchasers who used an "Exchange established by the State.” The Supreme Court added the words "or the federal government" because too many states did not set up exchanges. It's clear that the bill was very poorly drafted. In the bad old days, when Congress was the only legislature, this would have been a problem only Congress could fix. Instead, the executive and judicial branches conspired to cut Congress out of the process. This disenfranchises all of the voters who elected Senators and Representatives in 2010, 2012 and 2014. If the court had ruled that the statute meant what it said and the stayed its order until 12/31/15 to give Congress and the President time to fix the mess, that would have been a ruling on what the law is rather than what 6 justices thought Congress intended the law to be.

In the gay marriage case, the Supreme Court used the 14th Amendment to rule that gay marriage was mandated by the Constitution. In 1868, when the 14th Amendment was passed, homosexual acts were illegal in every state. The state legislators who voted to ratify the 14th Amendment thought they were ratifying equal rights regardless of race. When the 14th Amendment was used to invalidate laws against mixed race marriage, this was exactly what the ratifiers would have expected. None of them would have expected that gay marriage was what they had ratified.

One way to fix this might be a Constitutional Amendment permitting a Supreme Court minority opinion to be ratified by the legislatures of a majority of states within two years of any decision. If this happens, the minority takes effect instead of the majority ruling. This would put the brakes on crazy Supreme Court rulings that ignore the plain language of the Constitution or statutes. It would also give states back some of the power they have lost to the federal government.

I think that this is reasonable. The minority opinions are learned legal opinions, so this is not a blank check for the state legislatures. The mere possibility of opinions being overturned in this fashion might promote moderation and compromise in Supreme Court Decisions.  If the threat wasn't enough, the remedy would not be easy, but it would be easier than a specific Constitutional Amendment to overturn a bad Supreme Court reading of the Constitution. It also would be easier than impeachment to correct a bad appointment.

Confederate Battle Flag is Not Appropriate on State Capitol Grounds

A recent article by David French discussed the Confederate Battle Flag that flies over the Confederate war memorial on the state capitol grounds in Columbia, South Carolina.  Mr. French discusses the subject from the point of view of his Virginia family, which fought in the American Revolution, the Confederate Army, and most of America's wars since.  My family history starts early in Virginia, similarly to Mr. French's, then veers off. My ancestors from Virginia fought in the French and Indian War, where one of them served with Col. Washington, as well as the American Revolution. However, they decided that slavery was wrong. The last slaves my family owned were freed and sent to Liberia in about 1855 with money to buy land once they got there. My family did not think it was safe for them to remain in Virginia. My family then moved to California and stayed out of the Civil War as a result.

I can understand displaying the Confederate Battle Flag only in the context of war memorials and war cemeteries. However, in both cases, I think any of the official Confederate States government flags would be less incendiary, although less acceptable to Mr. French. I think that the Battle flag on the grounds of the state capitol is not appropriate, even if it's over a Civil War memorial.  It’s ironic that the Confederate Battle flag was originally displayed over war memorials and war cemeteries because the veterans wanted to be associated with the Confederate Army and not the Confederate government.  However, now the Battle Flag has assumed a different meaning.

It is the unfortunate truth that the Confederate Battle flag was appropriated by some extremely racist bigots as the symbol of their resistance to integration. Since this misappropriation occurred during living memory, it remains the way the Battle flag is understood by the vast majority of the admittedly ignorant population. It's hard for most people to identify the dates of the Civil War within 25 or even 50 years. The details of the conflict beyond the basics are not clear to most. I don't see any way this misunderstanding can be corrected in the next 50 years. Perhaps giving the flag a rest will allow it to return to its original meaning as the flag of the Army of Northern Virginia. 

http://www.nationalreview.com/article/420060/confederate-flag-should-stay-charleston-shooting-debate