A Huge Regressive Tax for Americans

We had hoped to report on further FDIC closures, but there were none.

The "Waxman-Markey" bill winding through Congress has an ostensible purpose of capping carbon dioxide emissions. According to US News and World Report, if passed, it will cost the average household as much as $1600 per year, "with low-income households carrying a heavier burden."

A puny, $160 per person tax credit is being proposed to offset the cost, but that will do little to help the average citizen.

Whatever the merits or demerits of a 'carbon tax', it should be presented in a revenue-neutral fashion. The current proposal will have a decided, depressive effect on the economy at a time when such effects are most definitely not needed.

The share of the US economy managed by government is at an all-time high, and still growing fast. This ill-conceived 'energy plan' along with similarly ill-conceived mandatory health insurance programs may push the Nation, already burdened with bailouts and nationalisations, too far down the road of a command economy.

Central planning does not necessarily wreck an economy, of course. Many European nations have a fairly high level of government involvement with the economy and still enjoy a high standard of living. But there, better social welfare results have been and can be expected from the taxes and regulation. We believe that is because socialism, whatever its demerits, is a proactive and coherent movement to distribute public benefits. In the USA, socialism is ideologically extinct, and government intrusion is reactive and self-serving.

A European level of government economic control in the USA will not yield European-style benefits, but an economic catastrophe. Mark our words.

The World's Biggest Board of Directors

Now that GM and Chrysler are de facto (and soon to be de jure) owned by the U.S. Government, the government in the person of the U.S. Senate is taking an interest in the operations of its automobile manufacturing operations. The Senate held hearings on Wednesday 'reviewing' the decision of the two companies to disenfranchise a number of dealerships.

This brings into plain view the inherent problem of government ownership of businesses competing in a private sphere. The government has no mechanism to guide business decisions. Politics is reactive, and that is no way to run a business.

Sound arguments may be put forward for the government operating commercial operations such as a postal service, but then it is set up as a part of the machinery of the state. It may be subject to some political pressures (the placement of post offices, distributions of contracts, and so forth) but this is merely the sort of cronyism one expects from any part of government bureaucracy.

The government could proactively set up a Motor Vehicle Manufacturing Authority and assemble a bureaucracy to run it. We don't advocate such a move but it would be preferable to the current situation: taking over corporations, telling the management that the government isn't going to be involved in the day-to-day affairs of the companies, and then proceeding to second-guess and meddle with management's decisions!

GM: The Next Part of AmeriCar

With Chrysler firmly in the morass of bankruptcy restructuring, GMAC under the financial control of the U.S. Federal Government, and General Motors on course with its own bankruptcy court, we feel confident saying that the foundations of AmeriCar - our pet name for a Soviet-esque national car manufacturer - are almost complete. GM, according to the Obama Administration, will be 60% owned by the Federal Government, effectively making it a national auto-manufacturer. Please do not believe the Administration's promise to 'exit' the car business when GM is "bank on its feet;" that would shrink the size of the United States Government, and would run counter to the trend of increasingly large Government ever since President Andrew Jackson.

At the same time, the TARP programme will likely be made permanent, as expected; it will turn into a revolving loan facility for the Government, to nationalise - oh, pardon, "invest in" - various enterprises throughout the U.S. With various banks itching to pay back their TARP loans, the Government will have money to blow on other ventures. We suggest that Ford start watching its back: it's the last independent American auto-maker, which makes it the last major piece of AmeriCar. After Ford is nationalised, we posit that various car parts manufacturers and service providers will be next on the menu. The Obama Administration has already implied this, as it has put a Federal guarantee on all GM and Chrysler warranties... and one cannot fulfil a warranty without the expensive parts!

Eventually, we expect that GM, Chrysler, Ford, and a slew of parts manufacturers will be eventually consolidated into our concept of "AmeriCar." This will be an abomination of mis-managed, corrupt, resource-wasting 'manufacturing' not seen since the fall of the Soviet Union... and it will end just as badly. Simply put, the Obama Administration is betting the farm on a near-term recovery in the U.S. and world economies. There are problems with this attitude.

The Administration pinning its hopes, reputation, and trillions of dollars on a quick end to this 'recession' is asking for disaster. The Government seems to be unaware that this economic calamity is something altogether more potent. Nevertheless, we wouldn't be surprised if the Administration indeed orders its pet car manufacturer(s) to produce around 10 million cars a year, but we would like to ask the President from whence he thinks the citizenry will have the money to buy these spiffy new vehicles.

Because this Depression is destroying the citizenry's ability to produce income, the last things they will want to do is spend their dwindling resources on additional un-needed automobiles. If anything, people will: keep their cars longer; own fewer cars (say, one); share cars, either informally or through farsighted corporations like ZipCar; or, totally discard automobiles altogether and use public transportation, bicycles, or their own two legs.

We can't think of any reason why AmeriCar should outlast the Obama Administration; it just doesn't seem feasible to keep up such extraordinary waste on such a colossal scale, but it will probably happen anyway. In all honesty, we are putting the AmeriCar fiasco as one of an increasing number for which President Barack Obama will leave office in disgrace... as well as lay the foundation for a new Franklin Roosevelt to seize the presidency.

P.S. To the Government: in order to have a successful car maker, reference Tesla Motors. Their $100,000+ Roadster has a fifteen-month waiting list.

Follow-Up on Loan Delinquency

The FDIC is reporting delinquent bank loans are 7.75% of all loans. While this is not yet as bad as mortgage delinquency which we discussed in yesterday's post, it is still capital-annihilating (since most of these deadbeat loans will have to be written off).

With their capital evaporating, banks must shrink lending. It is no wonder that so many businesses and individuals are seeing their credit lines cut or cancelled. As those who have the means to pay off said lines of credit race to do so, they will not be investing or spending money. This will have a dampening effect on economic activity, to say the least.

If the nationalised, yet insolvent Freddie Mac and Fannie Mae being ordered to expand their books to keep mortgage loans flowing were a precedent, we would anticipate an imminent, very large bank nationalisation instigated in order to have banks under political control and follow the directive to grow loans, no matter the ultimate cost. (The hurried, and ill-conceived TARP investments do little to give the Federal Government adequate policy leverage over the banks).

We think it wiser to let banks gradually expire. In the post peak-oil, resource-constricted world, there will likely be no further economic growth. In the aggregate, borrowing and lending will become much riskier propositions since loans will tend to impoverish, rather than enrich borrowers. There will always be room for lending to promising enterprises, but this will be a small niche.

It will be very shocking to witness much of the 20% or so of the US economy that is the banking and financial sector just go away. But there is no way around it. Like house building and automobile manufacturing, it is a sector whose preeminence has come and gone.

Pakistan, War, and Obama's 100 Days

A short post today, as we're a bit pressed for time. We got word of an apartment which needed cleaning out, and boy does it ever. Apparently the former tenant possessed several cats and dogs... and a goat. No, we do not jest, a goat. Still, free stuff is free stuff; we don't call ourself a frugal Scotsman for no reason.

Within the first one hundred days of U.S. President Barack Obama's term, he's behaved more or less as we expected. He's been busy, busy, busy: cutting deals with the super-huge banks, handing blank cheques over to American International Group, nationalising automobile manufacturers... and otherwise cementing our opinion that he is the Herbert Hoover of the 2007 Depression. A quick read even of President Hoover's wikipedia page shows eerie similarities between policies of these two Administrations.

But the one thing that President Obama hasn't done, which we were (and are) expecting him to do is to start a new war. Quite the contrary, he seems to be actually ending the occupation of Iraq! However, he has ordered a 'surge' in Afghanistan, which will probably end badly. Afghanistan is the meat-grinder of the world, where over-confident militaries are broken, defeated, and taught some humility in the process.

The only place which might be worse to invade than Afghanistan is probably Pakistan... and we have the sneaking suspicion that the U.S. may be 'invited' in by the Pakistani government to help 'secure' the nation against 'the Terrorists.' The rumblings for such a thing are already evident, at least to us, in articles like this one from the Associated Press. We suggest keeping an eye on the situation, as it could become very exciting very quickly if the U.S. decides that Pakistan needs 'assistance.'

The Foundations of AmeriCar

The actions of the Obama Administration are becoming evermore difficult to understand rationally. Halfhearted nationalisations were the bread-and-butter of the outgoing Bush Administration, something we remembered that President Obama promised to change. However, these actions (which are painfully similar to that of the Hoover Administration in the 1930's) have not ceased. If anything, we have the suspicion that the situation has become even more problematic.

An excellent demonstration of this is the situation between the Federal Government, and the deathly duo of General Motors and Chrysler. Although the relationship between the three parties is rather wiggy at best, we consider it a de facto nationalisation. Our evidence is simple: President Obama has ousted General Motors' CEO without consulting the dying company's Board of Directors. If GM isn't a nationalised company, we don't know what it is.

The shake-up of the CEO is, in a way, some muscle-flexing. The Obama Administration is perhaps making sure that the car companies know which side their bread is buttered. In a nutshell, the Government has its car manufacturers in hand, mostly. Like the formation of the National Railroad Passenger Corporation (better known as Amtrak), the formation of a national car company is probably in progress.

The next step toward such a company - let's call it AmeriCar - was taken by the Administration today. All new vehicles sold by Chrysler and GM with warranties will have those same warranties guaranteed by the Treasury Department. From whence the money to pay out these warranties shall come is immaterial; the important point lies elsewhere.

Setting aside the questions of moral hazard (20-year/1,000,000-mile warranty, anyone?), the potential implications of this arrangement are deep. If indeed the U.S. Government is to insure these warranties, it must make secure the supply of the parts necessary to keep crappy American automobiles scraping down the road for the duration of the warranty. The logical conclusion to this is that, the companies which make the parts necessary to fulfil those contracts cannot be allowed to go out of business.

Backing the Warranties may allow the Federal Government to nationalise (sotto voce) parts manufacturers for the American car companies. If it does indeed do this, then the foundation for AmeriCar are firmly set. If Amtrak is any indication, the products of this hypothetical car company will be horrifyingly wasteful and unreliable.

Pick Yourself Up, Dust Yourself Off - yeah, yeah

It is becoming quite clear to the less ignorant elements that some major restructuring of the economic sphere is in order. A host of economists without egg on their faces (Roubini and Taleb, among others) are calling for wholesale nationalisation of the banking industry. While we don't agree with them, we find the scale of that particular solution appropriate, and preferable to attempts to return to 'business as usual.'

Aside from our preferred solution of returning to bona fide money, any solution which at a minimum gets the world's circulating money out of the hands of the people who squandered so much of it is a step in the right direction. Stricter limits on what the banks may invest the circulating money in would also be an improvement.

Moving on from the financial troubles, it is obvious that neither the faux free-market system of the English-speaking world, nor the faux socialism of the EU can reliably deliver a modicum of prosperity to the masses. Major reform is in order.

One example of the sort of appropriately-scaled reform that ought to be on the table would be a negative income tax as the only form of national income support replacing social security, food stamps, and housing assistance (among other things). The idea has been lurking for quite a while, and supported by both liberals and conservatives, but has never been implemented. In our opinion the reason is that too many people make their living as welfare system bureaucrats.

This leads to the question, is major reform even possible? Has the political system become as dysfunctional as the grotesque that is the economic system? As the Depression grinds along, the presence or absence of political leadership will separate the societies that recover from the ones that don't.

Redistribution Worsens a Depression

A common theme of government attempts to 'turn this troubled economy around' is merely redistribution: taking money from taxpayers, and giving it to selected recipients; taking toxic assets, and replacing them with Treasury bills; taking private companies, and nationalising them (to some degree or other). In one way or the other, this process represents capital and income forcibly moved from one possessor to another.

For example: Ben Bernanke, Federal Reserve Chairman, recently announced that he is going to expand the Fed's balance sheet as much as necessary (scroll down to the speech's fifth paragraph from the bottom). He also said that the balance sheet would have to shrink in the future... but not to worry about such things now (same link, third paragraph from bottom).

This amounts to simply moving a problem hither and thither, rather than actually solving it. By definition, this is Lemon Socialism: taxpayer money reallocated by the government to support failed or failing enterprises. In essence, lemon socialism takes the bad decisions of a few, and forces the majority to pay for, and suffer the consequences of, those decisions.

As these enterprises have proven unsustainable, such 'zombie-ification' represents considerable misallocation of capital. This, in turn, means that incomes will be generally forced lower by the disruptive economic effects of the 'zombie' enterprises. Falling incomes are part and parcel of all depressions, and so such misguided government bailouts will only serve to worsen the 2007 Depression. Lemon socialism shenanigans are doomed to failure; however, Mr. Bernanke's Soviet-style speech makes clear he will try it anyway.

President-elect Barack Obama comes from a different bent. His economic recovery plan is redistributive from a populist perspective, meaning he will look to prop up the lifestyles of the broadest majority of people at the cost of a few. The simplest demonstration of this is by lowering taxes on 'the poor,' and simultaneously raising taxes on 'the rich;' one can throw in another tax rebate cheque or two for good measure. In a way, one can think of populist redistribution as the opposite of lemon socialism.

A more specific example, though, is the Hubbard-Mayer plan: if passed by Congress next year, this plan will make available to any house-buyer a 30-year mortgage of up to 95% of the house's value, all for a low, low 4.5% fixed interest rate. Estimates put the up front cost of this program at conservative $3 trillion.

Though the mortgage plan is certain to be broadly popular, it is a very, very bad idea: mortgage interest represents someone's income. It's not a fanciful thing, because the interest a bank charges does eventually become someone's means of living. By lowering the 30-year fixed rate mortgage from 6.1% (this year) to 4.5%, money is being pulled out of the economy, lowering income, and since falling income is the essence of a depression, this will exacerbate the 2007 Depression. The math: take 4.5% from 6.1%, and one gets a difference of 1.6%. Take 1.6% of $3 trillion, and one sees that this program alone will take away $48 billion of real income per year. Poof.

How Likely is Hyperinflation in the USA?

Hyperinflation is certain in Zimbabwe, but can such a thing happen in the USA? Typically, hyperinflation occurs quickly when economies are under extreme stress such as during wartime. The USA had that experience during its Revolution, and many European countries did so during and after the World Wars, and after the collapse of the Soviet Union and its satellites.

Are present economic conditions suitable for the formation of hyperinflation in the USA? The use of paper money creates chronic inflation, but what speeds up inflation to the point where doublings of prices occur not over decades, but weeks?

Typically two factors occur to induce hyperinflation. The first is when governments spend money well beyond their ability to collect taxes. This can occur when spending increases significantly (such as for a war). The second is when tax receipts fall significantly such as during a depression, and the government is unable to borrow money, and yet the government maintains, or even increases, spending.

Clearly, the first factor may come into play since the USA is presently engaged in expensive military campaigns abroad, and is undertaking a nationalisiation of the financial system. More subtly, the federal government has liabilities of over $60,000,000,000,000 (or $200,000 per person) - and growing. There is no way to tax the population sufficiently to honor this commitment in full, so 'printing up' money will be a temptation. Whether debasing the currency will continue at a fairly moderate pace, or will get out-of-control, waits to be seen.

The second factor has come in to play only so far as tax receipts are falling and spending is increasing. The USA still maintains its ability to borrow, at least for a time. Three things may come to pass that may end that privilege. First is the unwillingness of lenders - though at present that seems unlikely since Treasury Debt and Federal Reserve Notes are highly regarded. The second is the incapacity of lenders. As foreign trade crashes, foreign central banks and other corporations will simply have less money to invest in the USA. Increasingly poor domestic investors will be similarly unable to buy. Finally, the knowledge that increasing public borrowing at the expense of private investment (e.g. more money for unemployment benefits and less money to dig new oil wells) would likely make the Depression worse, may prompt the government to 'print' rather than borrow.

We do not care to make specific predictions of how much prices will rise and how quickly. We do believe that hyperinflation in the USA is a definite risk, as the 2008 Depression causes increasing income loss. At the moment, hyperinflation is not imminent, but stand by for further updates.