This book is a simply written, illustrated allegory which details how economies grow and what can cause economic collapse.  The book begins with three men who are stranded on an isolated island.  The men spend all day fishing just to catch enough fish to barely survive.  After a time, one of the men underconsumes and is able to use his savings to increase the number of fish that he catches.  From this action, an island economy is born.

The story continues for generations and generations (immigrants eventually come to the island) as the island’s economy continues to develop.  I will refrain from giving specific details about the economic expansion so as not to ruin this book.

The chapters contain “Reality Checks” which simply relate the material in the chapter to real life by defining the concepts which are outlined.  In these short sections, the Schiffs explain things like underconsumption, productivity, savings, risk, and so on.  The “Reality Checks” help readers who may have little or no understanding of economics understand basic economics principles.

At the end of each section is a much more detailed (but still simple and easy to understand) section called “Takeaway.”  These sections elaborate on the lessons from the chapter and give further explanation of the underlying economic principles.  They greatly enhance the book by providing the reader with a nice overview as well as a great segue to the next chapter.  The “Reality Check” and “Takeaway” sections both help move the story along and are features which would be great in other books on economics.

The first 5 chapters of this book are absolutely amazing.  The Schiffs do an excellent job of using humor to make reading about economics fun and easy to follow.  They explain the causes of a growing economy (and the effects of a growing economy on society) in a manner that is easy for anyone to understand, regardless of their economic background.

In chapter 6, however, things took a slight turn for the worst.  In this chapter, the Schiffs explain the foundation of a banking system.  I have heard Peter Schiff give speeches on this in the past–his speeches are great and include detailed information on the historical evolution of banking.  It is always interesting to hear Schiff speak about this and I wish that he had included more of this information in his book.  For some reason or another, the Schiffs do not tell the full story of the evolution of the banking system.  This is somewhat perplexing, as he wrote about this quite nicely in his bestselling (and highly recommended by me) book, Crash Proof.  I have also seen him give numerous speeches on this subject, all of which were great speeches which gave this full history.  The failure to include this can certainly be excused, as the Schiffs’ book was surely intended to be a brief, simple overview of how an economy works.

The “Takeaway” section of chapter 6 was also somewhat perplexing.  There was a disconnect between the material in the chapter and the “Takeaway” section which is likely to confuse some readers.  In this section, the Schiffs launch an attack on the Federal Reserve system without explaining to the reader exactly how this ties in with the information in the early part of the chapter.  While I fully agree with the Schiffs on the Federal Reserve, an uninformed reader might have a little trouble understanding the Schiffs’ early critiques of the Federal Reserve System.  To their credit, however, the Schiffs do properly explain this later.

I do want to point out to my reader that this chapter is my only real criticism of the book and that while it is worth pointing out, it does not take much away from what is truly an excellent book.

Following this section, the Schiffs continue to brilliantly explain the evolution of a developing economy into a major economic player.  While the time line is a little off (something that the Schiffs warn the readers of in the introduction), the Schiffs paint a largely accurate picture of the history of the American economy and the growth of the American government (especially with regards to its intervention in the economy).

I wont give away the ending, but the economy in the book suffers a fate similar to that of the American economy during the current economic crisis–the title promises to explain how an economy crashes, so I dont think that Im giving anything away.  However, the Schiffs looks into the future and offers a glimpse of what the future of the American economy might look like if we do not quickly enact sound monetary policies.  Given Peter Schiff’s history of correctly predicting the course of the economy, his prediction is certainly worth taking into account.

My rating:

Strongly recommend:  9/10

Americanly Yours,

Phred Barnet

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Ok, clearly the chart above indicates that something unprecedented and drastic has been happening in our banking system for the past two years.  But you are likely asking “what does this mean?”

The United States’ banking system is a fractional reserve system, meaning that banks are not required to hold 100% of the money deposited.  Currently, the reserve requirement (the percentage of deposits that banks are required to maintain) is 10% for checking accounts.  Thus, if you were to deposit $100 of your money into a checking account, the bank would legally be required to keep $10 and could lend out $90 to those borrowing money from the bank.  Any amount they kept on hand above $10 would be considered “excess reserves.”

For those interested, the data used to make the above graph can be found here.  A quick glance at either the data or the graph shows that for most of the past 50 years, banks have maintained reserves at levels very close to the levels mandated by the Federal Reserve.  On August 1st, 2008, banks maintained excess reserves of $1.875 billion.  One month later, excess reserves shot up to $59.482 billion.  On October 1st, excess reserves equaled $267.159 billion, reaching $558.821 billion on November 1st, and $767.332 billion on December 1st.  On April 1st, 2010 (the last date for which data is available), excess reserves totaled just over $1.05 TRILLION, or around 1000 times higher than they were 20 months earlier!

You are likely still asking what all this means.

Well…

What this means is that banks are keeping reserves on hand above and beyond the ratios required by the Federal Reserve.  Banks are likely doing this for several reasons:

1)  The banks know that many of they loans they initiated over the past several years are likely to default.  These loans were purchased by these banks using the cheap credit made available by increases in the money supply and low interest rates.  Thus, banks are keeping the “excess” capital on hand so that they can pay the interest on the money that they borrowed to make these faulty loans–even if there is a large number of loan defaults.

2)  This ties in with the reason above, but these banks are worried about the consequences of asking for another large bailout from American taxpayers.  The government bailed out these banks a year and a half ago, despite widespread public opposition and used the rationale that doing so would save the economy.  However, since this bailout, the economy has only worsened.  The banks know that it is unlikely that the American people would be as willing to allow their government to hand rich bankers taxpayer money again.

OK, so the banks arent lending right now, but what does this mean?

There is another major reason why the banks arent lending: we are in the midst of a pretty serious recession.  No one knows how long it will last, and my guess is that no one really knows just how bad it is right now.  With the exception of the Austrian Economists, not too many economists out there even say this crisis coming–much less lasting this long.

With so many people unemployed, so many businesses failing, and so few businesses expanding (or new businesses being opened), there just isnt a massive demand for loans.  This gives banks another reason to continue to hold “excess” reserves.

But, the economy is slowly starting to pick up.  As this happens, banks will begin to loan out more money and will eventually start to lower their reserves until they reach levels of excess reserves near the historical rate (in other words, near zero).  In fact, it is already happening:  On February 1st, excess reserves were $1.162 trillion, on March 1st, excess reserves were $1.120 trillion, and on April 1st, excess reserves were $1.05 trillion.  In other words, banks decreased their excess reserves by about 9.6% between February 1st and March 1st.

As the economy recovers and banks make additional loans, this will increase the supply of money in the economy.  An artificial increase in the supply of money is, simply put, not good.  When there is more money in the economy chasing after similar amounts of goods and services, the result can be nothing else but an increase in prices (relative to what prices would have been without the increase in the money supply).

The effects of the increases in lending brought about by an economic recovery will increase the money supply by much much more than $1 trillion.  As mentioned above, under our fractional reserve system, banks are only required to hold 10% of checking deposits and are able to lend out the remaining 90% to borrowers.  However, the process doesnt stop there:  if you deposit $100, the bank holds $10 and loans out $90 to someone else.  When that person deposits their money in a checking account, their bank is then able to loan out $81 while only holding $9, and so on.  As this process continues, banks effectively create (out of thin air) over 9 times the money that is held in their vaults and your $100 becomes nearly $1000 in the economy:

Thus measure of money supply is known as the M2 money supply.  Thus, if banks return to their historical activities and maintain reserves at a level just above the reserve requirement rate, the result could be an increase in the M2 money supply of around $10 trillion.  Currently, the total M2 money supply is just over $8.4 trillion, thus if banks start to lend out their excess reserves, the M2 money supply will more than double.

The implications of this are quite sobering.  If the economy does not improve and continues to muddle along, things will be bad.  Unemployment will remain high or possibly even creep higher, the stock market will continue to drop, people will continue to suffer and so on.

However, if the economy shows marked improvement and begins to accelerate, things will be much worse.  At first, this might seem counter intuitive, but we must remember to take the above information into account.  When the economy improves, banks will start to lend out their “excess” reserves.  Because of the fractional reserve nature of the United States’ banking system, each dollar that banks hold in excess reserves has the potential to become nearly $10 when loaned out.

At first, this will make it look like the economy is growing at a very fast rate.  After all, the newly created money is being spent by lenders to purchase things that werent being purchased before.  The increased demand for these goods raises their prices (and initially the profits of the businesses selling these goods).  This may result in a rise in wages for the employees in that sector of the economy.  However, when monetary inflation occurs at a rate as high as the rates we are likely to see, this phenomena spreads throughout the whole economy.  Thus, prices and wages will generally rise throughout the economy.

Anyone who thinks that this is a good thing is fundamentally wrong.  We often are presented with the argument that increasing the money supply increases incomes and is necessary because without such increases “there wouldnt be enough money to go around.”  As economist Tom Woods wrote in his best selling book, Meltdown, “It is to misconceive the nature and purpose of money completely to think its supply needs to expand in order to allow more transactions to take place.”  In fact, in a system with a stable money supply, “prices fall over time and the value of money rises.”  The reason for this is that “as output increases, the monetary unit simply gains in purchasing power.”

Monetary inflation (and the resulting price inflation) does not mean greater standards of living–the opposite is true.  What monetary inflation does do is destabilize the economy, increase the inequality of wealth distribution, and make society less better off than it would be under a stable monetary system.

Just ask the citizens of Zimbabwe if the massive increase in their nation’s money supply have made them better off.  In 1980, each Zimbabwe dollar was worth $1.59.  After 30 years of constantly increasing the money supply, their economy is in shambles, and their money is worth less than the paper it is printed on.   “In March 2007 Zimbabwe’s inflation rate passed 50% a month, a good threshold for defining “hyperinflation” and equal to 12,875% a year. Since then, it’s gotten much worse.” In late 2008, their price inflation rate reached the incomprehensible rate of “80 billion percent a month. That means around 6.5 quindecillion novemdecillion percent a year–or 65 followed by 107 zeros. To get a handle on it, realize that it’s equivalent to inflation of 98% a day. Prices double every 24.7 hours.”

Well then, if the argument that printing new money makes everyone in the economy better off has even a slight grain of truth in it, then Zimbabwe must be among the richest country in the world!  After all, Zimbabwe is following the economic philosophy of the “brilliant” John Maynard Keynes and his disciples who have argued that increases in the money supply bring about prosperity by accelerating spending.  Everyone knows that this is not the case, however.  Zimbabwe is among the poorest nations in the entire world and recorded a 94% unemployment rate last January.

Does this same fate await America?  Lets just say that something like this is possible.  The Federal Reserve has been printing money for too long and has accelerated these practices in recent years and months.  With a low reserve rate of only 10%, the Federal Reserve is just asking for trouble; when the economy recovers, things have the potential to spiral out of control quickly and result in a massive and destructive hyperinflation.

Yes, this can be slowed or even stopped.  But, before you get your hopes up, ask yourself  if the US government has ever learned from its mistakes or the mistakes of others.

Americanly Yours,

Phred Barnet

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http://seekingalpha.com/article/134820-the-worst-case-scenario-someone-has-to-say-it?ref=patrick.net

This article comes from what I believe is the best financial site on the internet. Its a list of predictions for what the worst case scenario will look like in 2012. I think that every prediction made in the article is accurate and will happen if the government continues to respond to this economic crisis in the manner that it has been for the past year and a half. His unemployment predictions for 2009-2012 are almost exactly in line with what happened during the Great Depression from 1930-1933. I think that the author’s timeline is probably off by a few years, but if we do not change our course, every single prediction in this article will come true within the next 10-15, and possibly sooner.

[[However, this might not be all bad: From the comments section of the article: "On the bright side, this means there will be no money to build machines that will wind up conquering us, so we won't have to bring a terminator back from the future."]]

We have more than doubled the amount of money we have in print in just the last year. We have “spent, lent, or committed $12.8 trillion” in less than 2 years–over 90% of our GDP–trying to stop this financial crisis from getting worse. This money has been printed, but most of it has only been pledged and has not yet been spent. When this money is spent, economic laws of the multiplier effect and the velocity of money, along with the realities of the current fractional reserve system will lead to a massive and unavoidable increase in the money supply. This will cause the value of the dollar (and any savings that you may have) to drop, while the cost of goods and services will rise.

If you have the means to do so, I suggest that you buy some gold… just in case.  This isnt just a solution for the rich.

On top of this, we are nearing a major crisis with Medicare and Social Security.  According to the Social Security Administration, the Medicare fund will be in a deficit starting this and will be completely exhausted by 2019.  Social Security will be in a deficit starting in 2011 and will be exhausted by 2041.

Future funds for these programs will have to come from general revenues, but the CBO is already forecasting trillion dollar deficits for quite some time.  Deficits in Medicare and Social Security will put an even greater strain on our budget.  This happening because of a collective failure which is the fault of all Presidents from President Franklin Roosevelt up to and including President Obama, as well as all Congressmen who refused to debate proposals to reform these programs for the past 60 plus years.

Here is an interesting article from the President of the Dallas branch of the Federal Reserve.  In the article, he explains that to fund these programs at current levels, spending will have to be cut by 97%!  I took a few quotes and posted them below:

“I would say the mathematics of the long-term outlook for entitlements, left unchanged, is nothing short of catastrophic.”

“And just to drive an important point home, these spending cuts or tax increases would need to be made immediately and maintained in perpetuity to solve the entitlement deficit problem. Discretionary spending would have to be reduced by 97 percent not only for our generation, but for our children and their children and every generation of children to come. And similarly on the taxation side, income tax revenue would have to rise 68 percent and remain that high forever. Remember, though, I said tax revenue, not tax rates. Who knows how much individual and corporate tax rates would have to change to increase revenue by 68 percent?”

To fund these programs, the government essentially has 3 options:  borrow, raise taxes, and print money.  At some point, other nations will stop lending us money.  It is only a matter of when.  Raising taxes is politically explosive.  The  economics of printing money is too boring for the vast majority of Americans to care about, making it the only political solution to this problem.

Of course, there is a 4th option:  cut spending drastically and reform these programs before our economy collapses.  But, does anyone think that Congress or the President will make any serious effort to do so?

Americanly Yours,

Phred Barnet

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When people call someone divisive, they are really expressing their dismay with the fact that that person is influential and does not agree with them.

Many people who did not attend last months “Tea Parties” ridiculed the parties and those who attended. Hundreds of thousands of your fellow citizens engaged in a peaceful protest. I think its safe to say that this was the largest set of demonstrations not directed against a war since the Civil Rights rallies of the 1960′s. You can agree or disagree with the message of those protesting, but you have to admit that the Tea Parties were a very well coordinated series of hundreds of protests across the Nation attended by those with legitimate concerns about the state of affairs. Writing off the Tea Partiers as rednecks or extremists is only going to make them feel more alienated.

Big government liberals and conservatives have gradually expanded the size, scope, and powers of government for decades. When people like me advocate reducing the size, scope, and powers of the government back down to its Constitutional principles, we are told that its “too drastic” of a change to make. It was much more drastic to change our government from a small, limited, Constitutional Republic to a massive, bloated, wasteful, Byzantine bureaucracy.

Many people who love to start political arguments will immediately shut down when a counterargument is made. They tend to do one of three things: change the subject, end the conversation, or launch a personal attack.

More people seem to pay attention to the newest reality tv show, the latest single, the personal lives of celebrities, or whatever sport or sports are being played at the moment than pay attention to the news and politics. With all of the news and information that is readily available these days, you really have to make an effort in order to be ignorant of what is going on. Sure, sports are great (I could care less about the rest of that stuff though), but in 10 years this stuff really wont matter to most people who werent directly involved in them. In 10 years, trillion dollar bailouts, the economy, individual rights, and government spending will continue to be extremely important.

Americanly Yours,

Phred Barnet

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Your policies idealistic and utopian.  You push your utopian views on the rest of us. They are proposed with no consideration of reality, practicality, present or future costs. Just because it sounds good doesn’t make it so. Every penny that our country borrows has to be paid back, either through taxation or inflation. There is no way around it. Yet, you continue to push for policies which will expand our national debt.

It is completely laughable that the Democratic Party Platform—the platform under which our current President was elected contains the following quote: “We will maintain fiscal responsibility, so that we do not mortgage our children’s future on a mountain of debt.”

Anyone who disagrees with your policies is slandered as “barbaric,” “unfeeling,” or is told that they “dont care about the poor.”  Your policies of statism are barbaric.  Your policies of welfare are hurting the poor.

Your policies are schizophrenic. You offer farmers price supports and subsidies to “help out poor farmers,” yet these measures increase the costs of food which end up hurting the poor non-farmers. The same is true in tobacco: you subsidize tobacco farmers, yet push for increases in tobacco taxes. You bailout auto companies to help them survive, then you set high emission standards on their cars and fund mass transit which reduces the need for automakers.

You want to tie us all together into you definition of society: a society where were all forced to care for each other and where we are all forced to help each other.  The want to sacrifice all individual rights for the collective rights of society.  It is not wrong to care for people, it is not wrong to help people, but it is wrong for the government to force people to do so.  I dont want to be tied to anyone.  If i choose to help people, let that be my choice.  Why should I be forced to pay for the health care of others?  Why should I have to pay for their mortgages?  Why should I be forced to pay for anyone to do anything?

You conveniently ignore data and facts. For example, I have showed that no matter how high or low income taxes have been, the government still collects 19.5% of GDP and that when income taxes on the rich are lower the rich pay a higher percentage of taxes collected. Yet, for some reason which cannot be explained, you want to punish the rich and make them pay for the needs of the poor and you want to do this by raising taxes on them. No amount of graphs, facts, or charts can change your minds.

You base your decisions on feelings, ideas, and emotions, rather than logic, rationality, and facts.

You claim to seek equality for all people, yet you somehow think that this can be accomplished by treating people unequally. For example, no matter how well intentioned, affirmative action is unconstitutional as it gives preference to one group over another.

You openly disregard vast sections of the Constitution of the United States of America.  You ignore the 2nd Amendment and push for heavy restrictions on firearms, failing to realize that if these measures pass, only the law abiding citizens will give up their guns. The criminals never will.

You ignore the 9th and 10th Amendments and push for greater Federal control over the States and the People.  And yet, you demand that the government recognize the right to privacy [a right that is not explicitly mentioned in the constitution, although it is definitely a right of the people] for the purposes of allowing abortion.

You cant have it both ways, either follow the Constitution, or dont. Instead, you follow it and refer to it when it is convenient and ignore it the rest of the time.

Implementing the national health care system that you are pushing would be such a quagmire.  It will be unnecessarily expensive, it will involve the expropriation of American businesses by the government, and it will be inefficient.  It will also stifle future research.  Government does not innovate.  Private industries innovate.  The only reason that we can even talk about having a nationalized health care system is because of the innovations and improvements made by private companies in the past 100 years.  Furthermore, it is wrong to make people pay for the bad decisions of others.  What can be the rationale of forcing a person, say a Mormon who doesnt drink, smoke, over eat, or do drugs to pay for the health care of a person who drinks, smokes, and overeats?  Should the person who has a healthier lifestyle be rewarded by having to pay less for health care?  Shouldnt the person who has an unhealthy lifestyle be punished with worse health and higher health costs?

How can you possibly oppose free trade?  Free trade is the natural extension of trade.  By trade I mean the buying and selling of goods and services.  By natural extension, I mean that on the lowest level, trade exists between individuals and that free trade only means extending this practice to allow individuals and businesses from other nations to engage in this practice with individuals and businesses from our nation.  Free trade benefits all.  It allows the best quality good at the lowest cost to be sold on the open market to any person who is willing to pay for it.

You want the government to solve all of your problems.  Your policies expand the government run safety net and take away incentives to take risks. It is not the job of the government to provide the public with housing, health care, and welfare. Who is to pay for these things?

I support stem cell research too, but quite a lot of people in this country have serious moral issues with it.  I dont understand how one party can be so insensitive as to use taxation to force people to pay for a practice that they liken to murder.  Let private labs do their own stem cell research.  We have the greatest scientists in the world.  Lets set them free to do research, rather than placing them under government supervision.

You arent liberals either.  You have expropriated the term liberal and used it for yourself.  The term liberal was not used to describe people like you, in fact, it was used to describe people like me.  A liberal was known as someone who supported individual rights, civil liberties, property rights, free trade, free markets, and a gold currency standard. With the exception of some civil liberties, the Democratic party and most “liberals” disavow all of the above.

The term progressive is a far less accurate term than the term liberal. For the vast span of human history, the people were at the will of the government. The government provided the people with all of their needs, or chose to withhold the needs of the people, as it wished. It was only when classical liberal ideas like those listed above entered into the minds of the governments were people truly free to pursue their own interests. This freedom led to the progress that has been achieved in the past 250 years.

The United States of America was the first truly free society in the history of mankind. Our society stressed individual and property rights and in a relatively short span of time became an advanced nation. It is no accident that human history stagnated for so long when governments were in control of the people. It is no accident that it was 1,000 years after the fall of Rome—well into the Renaissance Age (a relatively free society) before standards of living rose to what they had under the Roman Empire.

The technological progress that we have seen in the last two plus centuries is wholly due to the fact that people have been relatively free to pursue their own interests in this period without government intervention, regulation, control, and most importantly without the government being responsible for the health and well being of its citizenry.

And yet, so called progressives continue to push for the very ideas, programs, and controls that are incompatible with continued progress.

You Democrats are proud to be a part of “The Party of Thomas Jefferson.”  If Thomas Jefferson were alive today, he would spit in your face and denounce you in the strongest terms possible.  Thomas Jefferson was a man who absolutely hated the idea of a strong central government.  He is the man who said “I consider the foundation of the Constitution as laid on this ground: That “all powers not delegated to the United States, by the Constitution, nor prohibited by it to the States, are reserved to the States or to the people.” To take a single step beyond the boundaries thus specially drawn around the powers of Congress, is to take possession of a boundless field of power, no longer susceptible of any definition.”

Six time Socialist Party candidate Norman Thomas said: “The American people will never knowingly adopt socialism. But, under the name of “liberalism,” they will adopt every fragment of the socialist program, until one day America will be a socialist nation, without knowing how it happened. I no longer need to run as a Presidential Candidate for the Socialist Party. The Democratic Party has adopted our platform.”

Prophetic words.

[if you are a liberal, dont think im picking on you and leaving conservatives alone--tomorrow ill be writing about conservatives and Republicans]

Americanly Yours,

Phred Barnet

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http://www.coyoteblog.com/coyote_blog/2009/02/voting-with-their-feet.html

I find this to be very interesting.  With the exception of Louisiana, every one of the States listed in the bottom 10 is a State that is heavily unionized, has more social programs, and higher corporate taxes (and even Louisiana has high corporate tax rates).

The States with the highest positive net migration, however, are all “business friendly” states.  In these States, unionization is minimal, corporate taxes are generally low, and social programs are not as abundant.

You might think that people would want to live in places where corporations are taxes at a higher rate (so that they pay their “fair share).  You might think that people want to live in a place where there are more social programs to help those who are less fortunate.

The numbers, however, tell a different story.  While sticking a faceless corporation with a higher tax bill sounds great, higher taxes mean more expensive goods and either fewer jobs, or jobs that pay less (or give fewer benefits).  Social programs might help people temporarily, but they are no substitute for jobs.  The States above that taxed their corporations at higher rates and spent more of their budgets on social programs saw people leave.  Those people came to States like Georgia, Texas, and Tennessee.  States with low (or no) corporate income taxes and little if any union control over jobs.

While automakers in Detroit are moving out and leaving the country, foreign automakers from Toyota, to Kia, to Honda have built plants in the South where labor unions do not have an iron grip and corporations are not taxed for the “social good.”

There was an interesting article in the Wall Street Journal back in September comparing the economic policies of Michigan with those of then-Senator Obama.  Here is an interesting excerpt from that article:  “While the population of the three highest-performing states grew twice as fast as the national average, per-capita real income still grew by $6,563 or 21.4% in Texas, Florida and Arizona. That’s a $26,252 increase for a typical family of four.”

Policies of higher corporate taxation, heavy union control, and costly government programs impede economic growth. Would you rather have a government run safety net, or an extra $6,563 for each person in your family each year?

And more importantly, will people begin to leave this country if we pursue these policies on a national level?  They just might.  I just might too…

Americanly Yours,

Phred Barnet

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Typically, when the market hits a bottom and then starts to rebound, the recession will end in six months.  Of course, this is not a “typical” recession and past historical trends are never a guarantee of future results.

Yet, combine the recent rise in the stock market with the other factors that I mentioned above, and I think we have good reason to be optimistic that recovery is now under way.

This doesnt mean that we are out of the woods yet, or that things are going to magically get better over night.  In fact, the economy will probably shed another 1-2 million jobs or more before it begins adding them.  Still, the economy is fixing itself.

This is what recessions and recoveries have looked like since World War II (notice how our current one is not nearly happening as quickly, no as bad as most other recessions):

This is occurring despite government intervention, not because of it.  Markets are very powerful and they will always find a way to bounce back.

The massive “stimulus” bill passed by Congress last month was $787,000,000,000 [$787 billion] in size.  Very little of this money has been spent so far, and in fact the vast majority of this money is to be spent in 2010 and beyond (23% of the money will be spent in 2009 and 51% in 2010).  This bill is very costly and is being financed completely with debt that Americans will have to pay back in the future–with interest.

Members of Congress had only 10 hours to read the final bill before they were required to vote on the bill which was over 1,000 pages in length.This bill was passed by Congress urgently under the assumption that it was necessary that the bill be passed quickly.  I still dont understand why such urgency was required for a spending bill that wasnt going to spend most of its money for until the following year.

Well, now the economy is beginning to recover–before the “stimulus” has been spent.  As I have written several times before, both the CBO and the Federal Reserve are now saying that the recession will be over in late 2009 or early 2010 at the latest.  Even if their “latest” estimate is correct, the recession will have ended before the vast majority of the “stimulus” money is spent.  Because this bill is so costly, and because there is no need for an economic stimulus in a growing economy (which the experts say we will have by this time next year), I urge Congress to repeal the “stimulus” bill.

If the bill is not repealed, then Congress is in effect forcing the American people to borrow money to buy something costly that we dont need.  The economy will recover with or without the “stimulus” bill.  The difference is that if we allow it to recover without the costly bill, our future will not be [as] burdened by debt.

Americanly Yours,

Phred Barnet

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When Nikita Khrushchev was forced out of power in the Soviet Union he left his successor (Leonid Brezhnev) with two letters.  He told his successor to open the first letter when he came to his first major crisis and follow the instructions.   He was told that following the instructions would get him through the crisis.   He was also told that when a second major crisis stuck, he should open the second letter from Khrushchev and follow its instructions.

The inevitable crisis happened and Brezhnev became worried that the crisis could cause him to be removed from power.   He opened Khrushchev’s first letter which said “Blame everything on me.  The only way that you can stay in power is to blame everything on my poor leadership and announce that you have to reverse my policies in order to save the State.”

So, Brezhnev followed the instructions in the letter and things in the Soviet Union got better for a while.   However, after a few more years, the economy began to stagnate and Brezhnev once again became worried that he would lose power.  He realized that the advice from Khrushchev’s first letter had saved him once and that maybe it could do so again.

Brezhnev opened the second letter and it read “Sit down and write two letters.”

As I said above, this is not a true story.  It is however, a useful lesson on political survival.

I would argue that President Obama began reading his first letter during the campaign when he blamed everything wrong in the world on President Bush.  He has continued to beat up on President Bush’s record in a constant attempt to convince the public that the current crisis is not his fault.

He will likely continue to read from this letter for several years.

For example, if the situation in Iraq continues to improve and we can pull our troops out, Mr. Obama will undoubtedly take all of the credit, despite the fact that President Bush’s controversial Surge plan was a complete success and has effectively won us the war.  If on the other hand, the situation in Iraq deteriorates and we either do not leave within Mr. Obama’s promised 16 months or we end up leaving in disgrace, there can be no doubt that President Obama will blame Mr. Bush.

Similarly, if the economy turns around in the next year or two, Mr. Obama will take all of the credit.  If however, the situation worsens, the economy continues to contract, and unemployment approaches or reaches double digits, President Obama will claim that he inherited this mess.  In his speech last night President Obama said “I can’t tell you for sure that everything in this plan will work exactly as we hope, but I can tell you with complete confidence that a failure to act will only deepen this crisis as well as the pain felt by millions of Americans.  My administration inherited a deficit of over $1 trillion, but because we also inherited the most profound economic emergency since the Great Depression, doing a little or nothing at all will result in even greater deficits, even greater job loss, even greater loss of income, and even greater loss of confidence.” This was effectively Mr. Obama hedging his bet:  if the economy turns around, he can take credit, but if it doesnt work, he will say that things are still better than they would have been if the bill wasnt passed and besides, it is still President Bush’s fault.

This is why President Obama still sounds like his is running for President, rather than holding the office.  It is safe to say that President Obama was not elected to office based any past accomplishments that he had.   He was also not elected based on any future plans that he had.  Rather, he was elected because the American public was (and still is) fed up with President Bush.  The fact that Mr. Obama was elected President is really only an externality of the perceived failure of the Bush Administration.  Mr. Obama really didnt run against John McCain; he really ran against President Bush. How many times did you hear Mr. Obama refer to “8 years of failed policies?”   Because Mr. Obama was elected as an opposition candidate–a reactive candidate rather than a proactive candidate– he is likely to continue this course of acton.  Expect him to continue to beat up on President Bush’s record.  Furthermore, you can expect him to denounce Republicans who vote against his programs (in a manner that will probably become much more hostile in the near future).

The problem is that Mr. Obama cannot continue on this course for too long.  The American people are fickle and grow tired of things quickly.  Remember that when the War in Iraq started Bush (who was cheered on to war by the American public as well as the media) had an approval rating of near 70%.  At some point, the American public will grow tired of hearing Mr. Obama blame all of the country’s problems on the previous administration–especially if things get worse.  The people want solutions and when President Obama realizes that he cannot deliver them, he may have to reach for that second letter.

Americanly Yours,

Phred Barnet

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“If you’re headed for a cliff, you’ve got to change direction.”

This is true, but the problem is that Mr. Obama has misidentified the direction of the cliff that we are headed for.  A year ago, we were about to enter what would have been a somewhat minor recession.  Mr. Bush and Congress flipped out and spent hundreds of billions of dollars on a stimulus that completely failed.  Then, rather than allowing failing business to fail, Mr. Bush and Congress bailed them out one by one and then bought a bunch more.  I am not going to fully detail this now, but in a free market system prices are important not just because they tell us the value of something, but they also contain a lot of information within any given price.  Mr. Bush and Congress should have allowed the banks and insurance companies to fail and for the debt to be repriced, rather than subsidizing bad banks and investments and keeping debt priced at the same level.  But Mr. Obama is continuing the exact same policies that got us into this mess. If you disagree, then read about how Japan’s economy stagnated for 15 years when their government shored up bad private sector bank loans.

Our economy is racing toward a cliff and Mr. Obama is hitting the accelerator, rather than slowing down or changing directions.

“When you start hearing arguments, on the cable chatter, just understand a couple of things.  Number 1, when they say, ‘Well, why are we spending $800 billion [when] we’ve got this huge deficit?’  First of all, I found this deficit when I showed up, number 1.”

Um… yeah you did.  But how is that an excuse for spending $800 billion.  Remember the cliff that he mentioned above?  Didnt he also mention changing directions?

“I found this national debt, doubled, wrapped in a big bow waiting for me as I stepped into the Oval Office.”

The above quote from President Obama is almost true (the debt increased by about 85% during President Bush’s two terms).  But Mr. Obama has already requested about $1.2 trillion ($350 billion from TARP and over $800 billion from this “stimulus” bill) since he became President a few weeks ago.  That is an increase in the size of the National debt of about 10% in about 3 weeks!  Change, Mr. Obama?  Or just more of the same?

Americanly Yours,

Phred Barnet

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If you buy a house or some land, you become the owner of that property.

When the government charges a property owner a property tax, they are essentially charging the owner to use property that he already owns.  To me, at least, this idea is completely baffling.  I could not imagine how vocal the opposition would be if the government began assessing a 5% annual tax on the value of your jewelery or your ipod.  Why then should the government be allowed to charge you money to live in a house that you have already purchased?

The government does this because it has a captive audience, meaning that most of us cannot simply pick up and move our property to another county.  They also claim that in exchange for the increases, you will be given a better standard of living—new roads, better schools, and more parks.  I’m not even going to address the fallacy of these claims now.

The main problem now is that the government is raising property taxes at a time when foreclosures are growing and the unemployment rate is surging higher.  Simply put, people are hurting for money and they are afraid of losing their jobs.  This is the wrong time for the government to raise property taxes on its citizens.

You might be saying that you dont own your home, and therefore the increases in property taxes do not affect you.  However, you are wrong.  If you rent your home or apartment, the owner of the property still has to pay property taxes to the government.  Any increases in his property taxes will likely lead to increases in your rent.  Homeowners arent the only people who are required to pay property taxes.  Businesses also pay them.  When property taxes on businesses increase, so does the cost of goods and services produced by the businesses.  Even worse, these increased costs on businesses could cause companies to cut down on their employees’ hours, or even cause the businesses to fire some workers.
Property taxes are immoral because they result in the government charging you a fee to use something which you have already purchased.  When the government charges a property tax, they are essentially saying that even though you have already bought the land, the government still considers it to be their land, and they reserve the right to charge you to use it.  In fact, you could argue that property taxes are nothing more than the government charging you rent to use your own property.

Besides this, property taxes are not fair to older Americans.  Retired Americans who are earning a fixed income from Social Security or their corporate pension already have to deal with inflation in the costs of everyday goods.  It is unfair for them to also have to continue to pay taxes on something that they may have purchased decades ago.

Americanly Yours,

Phred Barnet