You Can't Fight The Fed

The Federal Reserve sparked a rally on Wall Street Wednesday by announcing that it is allocating approximately $1.2 trillion toward open market operations designed to drive down interest rates. Clearly the Fed succeeded in its primary mission. Long-term treasury rates collapsed by about four-tenths of a percent. The dollar has also taken a hit. I wonder what the Chinese are thinking. If I were a Chinese central banker, I might ask Hillary next time she G5s her way to Beijing for a sales call why Americans shouldn't just finance their own debt if it's as simple as the Fed "expanding its balance sheet" in the form of buying treasuries.

Well, I guess maybe it's not that simple. Thursday and Friday the market took back the Wednesday's rally, but gold hasn't shut down. Gold turned on a dime Wednesday with the Fed's announcement, and continued higher through Friday. Ditto oil, and many other commodities. No, you can't just "engage quantitative easing" whenever the economy slows, and expect the action to be consequence-free.

Which is not to say I'm against attempts to "reflate". In fact, I think the Fed's move is an appropriate response to conditions, at least when viewed through a prism unobstructed by the insanity coming out of the Supreme Soviet and the President Shakedown administration. I know that's a little bit like saying I think the A's will win their division this year, IF everyone has a career year and no one is injured. But what is the Fed in business for, if not to take action to prevent the kind of deflationary spiral which most observers would agree, I think, remains a real possibility?

Indeed, Goldman Sachs chief economist Jan Hintzius said on CNBC this morning that the Fed action is not enough, and further that fiscal policy isn't stimulative enough. So I think we can say that the Fed doing nothing would be broadly considered irresponsible. And as "quantitative easing" is a term used to describe throwing cash into the system by purchasing securities on the open market, it also means "we can't lower interest rates below zero, so all we can do is print money". So that's what the Fed is going to do.

Again, if the root of our current troubles is the popping of the real estate bubble, then Fed action that would surely seem to put a floor under real estate and encourage spending (inflation means spend now, it'll be worth less later; deflation means don't spend now, it'll buy more later) seems rational. And I fully expect the markets to react well in the near to medium term. But the longer term problem is that the Federal Reserve's monetary policy isn't being applied in a vacuum. It must be viewed through the prism of the political class' fiscal policy.

When President Reagan was first elected, our nation faced economic peril which I am still contending far exceeded today's. If our current situation deteriorates to a point that it is worse than the depression of 1980-1982, then it's because instead of having a President Reagan, we have a President Shakedown. When President Reagan took office, inflation was the growth killer, because expectations of future inflation kept interest rates high. The solution was to kill inflation, but stimulate non-inflationary growth (through tax cuts). In other words, revive animal spirits, and allow risk-taking on new technologies and methods generate new wealth without printing money.

Currently, the growth killer is deflation, so we need to re-inflate, but with a bias, again, against inflationary growth. That means a bias against wasteful government spending, and in favor of entrepreneurial risk. As we are already seeing, simply inflating has consequences - if not (yet) in terms of rising interest rates, then in terms of higher commodity prices, which will impede growth rates, and thus re-employment. And, in contrast to the way in which Fed Chairman Volker's anti-inflation jihad of the early 1980s magnificently complemented Reagan fiscal policy, now we have a Fed Chairman who quite properly has signalled that he will do what it takes to prevent deflation, but who is paired with an administration that is hostile to capital, investment, and entrepreneurial risk. Thus, as Dennis Gartman repeated Wednesday after the Bell, it's still time to invest in things "that if you drop them on your foot, it hurts". You may be albe to throw out a government in two years, but you can't fight the Fed.

China's Capital Gains Tax Rate Is What?

Recently Larry Kudlow leaped atop his ever-present soapbox to proclaim the great irony that "communist" China does not tax capital gains. That's right: China's capital gains tax rate is zero. Evidently, in "communist" China, the concept that you can keep whatever profit you can manage from a transaction (and suffer alone the consequence of a loss) does not violate or contradict "communist" theology. See contra, of course, former Democrat House Leader Richard Gephardt, who, during the Clinton administration (if memory serves), pronounced that lower capital gains rates were "anathema to Democratic Party theology"(emphsis added). There is a reason why I this was "seared" in my memory.

The capital gains tax, very simply, is a tax on capital formation, and therefore on job creation and innovation. It has little to no usefulness as a tool of economic policy or revenue generation. It is nothing but a political football. Many modern economies, in addition to China, simply don't tax capital gains. The benefits derived from what little revenue generation occurs are too easily outweighed by the destructive impact on the general economy. I will maintain over and again that a big part of the reason why we're in the mess we are is because once the Dems regained control of Congress in November, 2006, everyone knew low capital gains rates were in jeopardy, and that any hope for help on the tax front which would ameliorate the collapse of the housing bubble (largely created by Democrats in Washington) had vanished.

What prompts me to write this, however, is the appearance of Congressman John Campbell (R, Irvine), on Hugh Hewitt's show yesterday. He is going to propose a capital gains holiday for any capital investment made during 2009 and held for at least twelve months. I think this is brilliant. Rep. Campbell credited a constituent who just sent him an e-mail with the idea. I also think it has the proverbial snowball's chance in hell, sadly.

I think the Campbell proposal is brilliant because it directly addresses significant problems in the economy which are impeding growth and job creation. Specifically, it addresses the biggest problem facing us today (economy-wise) apart from toxic assets. That problem is appetite for risk. Velocity dried up last fall because there was no appetite for risk on the part of businesses, investors, consumers, or whomever. This was clearly evidenced by the 0.01% rates that obtained with respect to both the one month and three month treasury bills - in short, there was money out there, but it was parked in short-term securities. (Today, the rates are 0.11% and 0.19%, respectively.)

If investors know that they can add a minimum of 15% to their profit projections, and more likely at least 20%, by virtue of federal capital gains taxes being waived, do you think that might spark a wave of investment in capital assets which, by the way, are way down in price? That would really solve the velocity issue. And it would probably spark the creation of new businesses and employment. Capital markets would be markedly buoyed, and balance sheets would start looking much better. There would be a wave of activity, in 2009, that would provide a near-magical boost to 2009 GDP.

And, here's the really great part. There would be little to zero static reduction in capital gains tax revenue for at least twelve months, because many of these assets would not have been purchased and sold within that time frame absent the holiday. Moreover, from a dynamic standpoint, it is likely that the boost to GDP growth would generate increased revenues from other tax sources (e.g., income taxes, etc.). Any theoretical loss of revenue in the out-years would, according to the President's budget projections, occur when the economy surely will be booming and generating all sorts of revenue from other sources.

This is such a winner of an idea, the only thing that could hold it back is something like... theology. Only religious fanatics would not see the merit in this proposal - provided their concern is actually in improving the economy. Unfortunately, religious fanatics are in control, and the religion is what is very misnamed as "liberalism". I'm sure I've said it before, but "liberal" is the pre-eminent Orwellism of our time.

Liberals aren't. They've got a whole scheme of theological canons they adhere to, which are impervious to reason, and taxing capital is at the top of the list. No matter what the data show regarding manipulation of the capital gains tax rate (such as increases in revenue when rates are reduced), all these campus radicals want to do is tax capital more, because capital gains are bad. The "communists" in China have got around to deciding that this "thinking" is madness, but the campus radicals chic-ing around the Supreme Soviet in Washington love it. Ronald Reagan is rolling over in his grave because the world is upside down.

Quote of the Day

“Socialism is a philosophy of failure, the creed of ignorance, and the gospel of envy, its inherent virtue is the equal sharing of misery.” Winston Churchill

Today's Markets

Today was a banner day for the stock market. After the worst January in History, and the worst February since 1931, the major averages had their best day since a couple of big rebound days last fall. The Dow gained 379.44(5.80%), while the Nasdaq gained 89.68(7.07%), and the S&P gained 43.07(6.37%). This constitutes the first rally attempt of the Obama Bear Market.

These numbers are very impressive; however, their significance, or lack thereof, will be revealed in the next few days of trading. Do we have a new bull market at hand? A strong counter-trend rally? A dud? A big rally on high volume Friday or next Monday would be an excellent sign. Contrary-wise, a failure to see such a rally in the next week will bode ill. In any case, today's action is the type which typically signals a new rally - it just doesn't guarantee one.

Two major factors have been cited for the rally. First, a news item that Citibank was profitable for the first two months of the year buoyed confidence that there is hope in the financial sector. Second, but perhaps more importantly, the criminal Barney Frank indicated that his House committee would revisit the uptick rule. The suspension of this rule, which formerly prevented short sellers from taking a position on a "down tick", has been cited innumerable times by the likes of Jim Cramer, Larry Kudlow, Steve Forbes, and others as a major factor in the market's crash. I absolutely adhere to this school of thought, and in fact believe that it worked in diabolical combination with FASB 157 ("mark-to-market") to annihilate financial stocks.

I also think a third factor was at work as well. Last week, I opined in the midst of the insanity coming out of the Shakedown administration, and the accompanying market meltdown, that the spark for a new rally would come from a congressional defeat visited upon the administration vis-a-vis its budget, or some other major agenda item (card check?). I think something akin to this was at work today. Over the weekend, and continuing today, we have seen a number of big names who voted for Obama question his priorities. In fact, it would not be an exaggeration to say that at least some of these people expressed buyer's remorse. On Monday, Warren Buffet, a notorious rich Democrat, in so many words said this guy's priorities are all screwed up. Last week Jim Cramer called Mugabe administration policy "insane". Over the weekend, several liberal pundits evidently felt safe to come out of the closet on the administration's flat earth economic policy.

I think the market, in addition to factors one and two above, was buoyed by the notion that there are just enough sane democrats, in office and/or in punditry, to put a check on President Shakedown's efforts to take down the economy. Watch how these atmospherics progress as you watch the markets. Perhaps, to the extent the Mugabe administration is forced to retreat, we will see a market rally. Watch especially for word from Washington concerning FASB 157 - Steve Forbes said over the weekend that the Dow would rally 3000 points in a month if FASB 157 was junked, and the uptick rule reinstated. Beyond that, I don't think there's a great deal of potential in this market, because the campus radicals still dominate D.C. And remember, the averages still have a little ways to go just to climb back to what only recently were considered rock bottom support levels. Let's all take a look at this post at the end of the month and see how things turned out.

Today's Economics Lesson

The following quote is from Douglas Holz-Eakin, economist and former director of the Congressional Budget Office. It is from a forum of economists and others (including Jim Cramer) pondering the wisdom, propriety, and "fairness" of President Shakedown's "soak the rich" policy.

This is a misguided policy toward fairness. Rising inequality is a 30-year process with its roots in skills and education -- not tax policy -- and creating punitively high top tax rates to fund checks for low-earners does not address the underlying issues.

The phenomenon described above is something any reasonably far-sighted person could have discerned as our economy has moved in stages from agriculturally-based, to "smokestack", to "information", and now, it appears, to "imagination"-based. The Wall Street Journal discussed this matter thoroughly in a series of editorials two decades ago. Continually, the WSJ spoke of "returns to education" increasing as our economy became more knowledge-based. This fact of life raises a whole host of questions about policy-making, not least of which, it seems, is whether certain people in policy-making positions are going to pretend to ignore it for political reasons.

The topic of how returns to education, and not tax cuts, is the root cause of (previously) widening income/weatlh distribution is properly the subject of a book, so it's going to be difficult to keep all I have to say to reasonable post length. The first hurdle to clear in analyzing the phenomenon is whether one will choose to accept that widening income distribution is a function of education becoming more and more valuable as an economy becomes more and more knowledge/information/imagination-based. The next point of analysis would be: is this bad, and if so, what do you do about it?

Personally, I am not real keen on widening income distribution, for reasons that are rarely, if ever, discussed in the popular media. However, it has to be viewed in the context of alternatives. If the creation of greater wealth by virtue of both a greater store of and ability to manipulate and apply knowledge and information is taken as a good, then why would you want to discourage the same by, for example, taxing it? Do we really want to discourage the accumulation of knowledge in the name of "distributive fairness"? As preposterous as this notion sounds, I think it is particularly so because the more freely knowledge is accumulated, manipulated, and applied, the greater the increase in living standards in, for example, the lowest income quintile. This, to me, is especially important because that is where increasing living standards is especially important.

Conversely, slowing the accumulation of knowledge and its application by artificially suppressing the application of knowledge is the same as slowing the creation of wealth, which is going to hit the poor the hardest. Taxing capital gains, dividends, and interest, as well as ordinary income, at higher rates is the functional equivalent of suppressing the accumulation and application of knowledge. It is a burden on wealth creation. And lest you think to yourself, "who cares about wealth creation, the wealthy have enough", I ask you to analyze the matter in light of recent experience. The opposite of wealth creation is wealth destruction, and if some rich person has 50% of their wealth destroyed, they're still rich - if a person of more modest means has 50% of their wealth destroyed, they're in trouble. You may have greater wealth equality, but you also have more hardship.

To sum up, growing disparities in wealth (which have likely been more than arrested in the last six months) were the result not of Bush or Reagan tax policy, but of the modern economic reality of education's greater and growing value relative to unskilled or modestly skilled labor. Addressing this problem by instituting policies that cause wealth destruction may bring greater equality, but hurt lower quintile earners too much. A better approach is to continute to encourage accumulation and application of knowledge through education, seek to expand true educational opportunities and choice, and expand awareness among those who do not avail themselves maximally of education that opportunities abound for separating from those who do all that excess cash they'll be accumulating. That, and maybe reducting the supply of lower-skilled workers by clamping down on illegal immigration. You think any good liberal would be keen to help the poor among us by applying that basic fix?

The California (Banana) Republic

A couple of years ago, one of my dear wife's relatives, a highly intelligent individual (as they tend to be), a Maine-iac, asked me how things were in California. I told him exactly what I thought: "California is a banana republic". He scoffed. A "banana republic", he said, is like, what? Guatemala? Honduras? Not California. "Mark my words", I told him. "The state government is a joke, and it's run by jokers".

I'm not going to bother remarking on the recent budget battle, except to note that a number of states were able to run surpluses and establish rainy day funds while the economy was booming and revenues were gushing. California couldn't get out of deficit if the economy was growing 10% per year. We don't have economic problems so much as we have political problems.

But no, I'm not writing this because of the old news that the state can't pass a budget on time, or balance one. I'm writing this because of the news today that the unemployment rate in California has eclipsed 10%, for the first time since 1983. A year ago, the rate was in the low sixes. California's unemployment rate is probably a good 2% higher than the national average. That is just inexcusable.

I can understand why Michigan, for example, battles high unemployment. Or, for that matter, why several other states whose economies are heavily dependent on cyclical industries might suffer. But California is so big, and its economy so diverse (ugghh!), that there is just no good reason why California should suffer more than most states. No good reason, but there is a reason. It's been turned into a banana republic. Warning to the rest of the country - President Mugabe wants to do for the rest of you what's been done to the (formerly) Golden State.

Today's Economics Lesson - Laying Down the Laws

Previously on this blog we have discussed Hauser's Law, which holds that changes in income tax rates don't meaningfully alter income tax revenues as a percentage of GDP. We have also recently discussed Santelli's Law, which holds that in order to decrease deficits, you must increase GDP. Now, I give you, Thacker's Law. It is as follows:

Increases in tax rates NEVER yield the increases in tax revenues its proponents predict; and decreases in tax rates NEVER yield the reductions in tax revenues its opponents predict.

The Radical President

This morning Rush read the last paragraph of Daniel Henninger's WSJ column, entitled "The Radical Presidency". Herewith that paragraph:

Gov. Bobby Jindal's post-speech reply did not come close to recognizing the gauntlet Mr. Obama has thrown down to the opposition. Unless the GOP can discover a radical message of its own to distinguish it from the president's, it should prepare to live under Mr. Obama's radicalism for at least a generation.

Mr. Henninger is exactly right. He is also right that this is a "radical presidency", and a radical president. As I've said, Barack Mugabe intends to take down the country by inducing a depression, so that he can remake it in his image. Republicans have to start explaining this now - and offer bold alternatives - in order to realize the big gains in 2010 that are both (a) achievable; and (b) necessary to derail the stealth coup d'etat that the President is attempting.

What form do I think "Republican Radicalism" should take? I don't have enough time or space, so I'll distill the matter to two simple elements. First, explain how Mugabe is doing everything wrong, assuming he wants to bring about recovery. Raising tax rates in a recession is exactly the wrong thing to do - it is exactly what Hoover tried; moreover, it will not raise revenues as expected. Lowering the mortgage interest deduction is exactly the wrong thing to do, if you want to shore up asset values. Raising taxes on interest, dividends, and capital gains is exactly the wrong thing to do, if you want to support asset values and facilitate lending. This is how we begin to pin the depression on Mugabe. Another job will be to talk, talk, talk about how affirmative action lending got us to this place; blame it on Mugabe (through his association with ACORN); and point out that all of this spending is going to make things worse, not stimulate.

Element #2 of Republican Radicalism is its affirmative side. It can be summed up in two words: flat tax. Now is the time. Stop playing games with the tax code every time an election shifts the balance of power; stop "spreading the wealth" to accountants and tax and estate lawyers; and go institute a simple, understandable system under which higher income taxpayers will pay much more than lower earners, but not face 50%-plus taxes on each additional dollar earned. The efficiencies and incentive benefits would be so stupendously great that we just might be able to cut the deficit in half in four years.

Per Mr. Henninger, Republicans need to go radical. I say this means go libertarian. Not as libertarian as Libertarians would go, but take a bold step in their direction. Put this simple choice to the voters: do we want to sustain our heritage of limited government - the ethos that made this country more than any other; or do we want to be a nation of unlimited and unrestrained government? Where is the historical basis for that? Pushing the flat tax would throw down a gauntlet of our own, and go a long way toward exposing which is the party that can't live without getting all in your business.

Quote of the Day

“No American is ever made better off by pulling another American down, and every American is made better off whenever any one of us is made better off. A rising tide raises all boats.” John F. Kennedy

The Obama Depression

Our favorite columnist, Holman Jenkins, lays it all out for us today. He wrote the column I would have wanted to write. I've been contending that President Mugabe-Wannabe doesn't give a damn about the economy. His concern is getting even with The Man, and he's going to try it because he thinks he can blame Bush for everything he purposely does to screw things up. If you think I'm crazy, just watch him.

Let's hope Holman Jenkins is correct in his prediction as to where this cowardly strategy will take the Obamalama:

He kids himself if he thinks he will be allowed, like FDR, to preside over a Depression without being blamed for it. The public is different now - the world is different - and he will own the "Obama Depression" sooner than he thinks.

We can only hope. But I'm telling you now he's sowing the seeds, with his Depression policy, of what will be (finally) "the worst economy since the Great Depression".

The quote above is actually from the end of Mr. Jenkins' column. He began by quoting the Obamessiah himself, from the inaugural: "Put away childish things..." Mr. Jenkins has a list of things for the President to put away, as follows:
1. "Put away the global warming panic";
2. "Put away the 'energy independence' conceit";
3. "Put away Ponzi welfarism"; and
4. "Put away class warfare tax politics".

I'm not holding my breath. We have no reason to believe the crack dealer in-chief is anything other than a Chicago race-hustling thug - apart from his Sidney Poitier sweet talk. For all the talk of change, hope, post-this, and post-that, the "stimulus" told us all we need to know: as Mr. Jenkins described it, once in office, his interest is in fulfilling the wish lists of those who put [him] there."

If nothing else, says Mr. Jenkins, this is going to be a fascinating presidency.

But his presidency will get really interesting in a year or two, or six months - whenever he finally realizes that everything he thought he wanted to do is irrelevant. He'll then have to adapt an agenda for the world as it is, in which many childish things no longer have a place.

After 9/11, many of us hoped that our political "leadership" would wake up to a new world in which clownishness and ancient shibboleths would no longer be tolerated. Sadly, the clowns, communists, and incompetents fought tooth-and-nail to preserve their positions, using every dirtbag trick in the dirtbag politician's book. Look at where we are now, as a consequence. And the ultimate dirtbag, President Shakedown, is betting his presidency on his ability to sell more of the disease as a cure, with his ability to blame the resulting depression on his predecessor as the backstop. Mark my words: he intends to sink the country.

Kudlow's Take, Santelli's Law

President Hope-a-Dope is continuing to spook the markets. Which is not to discount the lousy existing home sales data (though this didn't surprise anyone). The overall theme is that there is a continuing absense of detail characterizing the administration's economic policy musings. This lends credence to the suspicion (which is reasonably based on his history as a Chicago racial agitator and the most leftist - according to Roll Call - member of the U.S. Senate, as well as his campaign rhetoric) that this guy is the Mugabe wannabe his biography suggests.

Larry Kudlow divines from the speech last night a likelihood of rising marginal tax rates, as well as a costly new regulatory regime (e.g., cap-and-trade, etc.). Steve Leesman then chimes in that he doesn't see the big deal about a two percentage-point increase in marginal rates. I do. The problem is appetite for risk. And that gets to the heart of the matter with this administration: it's not doing anything to increase anyone's appetite for risk, and doesn't seem to care.

Rick Santelli has been terrific through this period. To Leesman's sympathy with the notion that deficits can be reduced by raising marginal rates, Santelli expounds what I will now dub "Santelli's Law". "Deficits come down when the economy generates revenue. That's the dynamic." Santelli continued on this theme to describe the concern of traders as he sees it: "How deep is this (deficit) hole going to be, and are we going to be able to pull ourselves out next time?"

The problem we are going to be facing over the next several years, very simply, is how a program of massive spending is going to be financed, especially given what I will refer to as the "China Syndrome" (a matter that will be discussed in another post shortly). If we don't "generate revenue", we're in big trouble. That means we have to grow. And we're not seeing anything from the administration that is truly pro-growth. Congress is comprised of clowns, communists, and incompetents, and the markets know it (when Barney Frank and Chris Dodd are chairing the committees before which Ben Bernanke testifies, how can you feel optimistic?). President Mugabe-Wannabe is "hostile to capital" (per Larry Kudlow), and the markets know it. Hence, Louise Yamada's prediction (see "Scary Charts", December 3, 2008) is looking more likely. Have a nice day.

Investment Thought of the Day

Don Luskin appeared on Larry Kudlow's show Friday and announced the coming of $2000 gold. His argument is compelling. The Fed's "balance sheet" has been vastly expanded, and there's zero chance that it will be meaningfully contracted during any recovery. That would require an awful lot of political will, and might in any event be undermined by Mugabe, err, Obama administration policy a la Jimmy Carter vis-a-vis Paul Volker, c.1979-80.

In a "Clash of the Titans" moment, David Malpass begged to differ. He says that according to official Fed records, the Fed has already begun to suck up liquidity (presumably, by selling treasuries from its inventory). Luskin's response: "How do you know when the Fed is lying? Its lips are moving."

I think any rational observer must presume that when a government, any government, finds itself in a bind, it's going to do what comes naturally. Inflate. However, as a self-certified wannabe economist, I can't just let that go without a good, solid, "on the other hand". I have heard Bernanke speak at length on his scholarly efforts as a specialist in Great Depression studies (Prozac alert), and I can readily conceive that he would like to undo with much haste any monetary excess he necessarily, but regrettably, promoted. On the other hand, like I said, Carter's Treasury Department engaged in some monetary engineering to undermine Chairman Volker's efforts to slay the inflation beast, so I certainly wouldn't put such past President Hope-a-Dope.

Quote of the Day

“It is quite easy to get change. It is not so easy to get progress.”
Emperor Franz-Josef

Andrew Jackson on Religious Tolerance

"General" Jackson was villified throughout his public life as an uncouth backwoods ruffian, not totally without justification. For example, do you think John Quincy Adams would have been caught dead (pun alert) on a dueling ground? Nevertheless, Jackson was clearly a very bright man, and his self-education is awe-inspiring.

In Robert Remini's "The Course of American Democracy, 1833-1845", we find an anecdote in which an old woman so feared for the nation, due to the "late arrival of catholicks to our peaceful and happy land", that her granddaughter was moved to write the General for reassurance that he wasn't himself a closet "catholick", intent on establishing an "Inquisition in the United States". The General's response:

I was brought up a rigid Presbeterian, to which I have always adhered. Our excellent constitution guarantees to every one freedom of religion, and charity tells us, and you know Charity is the reall basis of all true religion, and charity says judge the tree by its fruit, all who profess christianity, believe in a Saviour and that by and through him we must be saved. We ought therefore to consider all good christians, whose walks correspond with their professions, be him Presbeterian, Episcopalian, Baptist, methodist or Roman catholic , let it be always remembered by your Grandmother that no estalished religion can exist under our glorious constitution.

Judge the tree by its fruit, have charity toward all those whose walks correspond with their professions, in so far as their professions are charitable, and recall the glory of our "excellent" Constitution and its First Amendment.

Today's History Lesson

Is from "Andrew Jackson, The Course of American Democracy, 1833-1845", by Robert Remini:

Under Jackson virtually every federal department was 'reformed', and the Post Office and Land Office, which employed more than three-fourths of the civilian personnel of the entire government, underwent major overhauls. (Emphasis added.)

Imagine. No need for the central government to get all in everyone's business, so it consists of the Post Office, the Land Office, and little else. No wonder Jackson paid off the national debt.

The Chicago Tea Party

Anyone reading this who hasn't seen the video of Rick Santelli on the floor of the Chicago Merc today should check it out at cnbc.com. Rush played the audio on his show. Santelli flat out said this stimulus is idiotic, and got a huge cheer from the traders. Specifically, he took huge issue with the notion of the Keynesian "multiplier", calling it nothing but an excuse to spend other people's money. He pointed out pointedly that if the "multiplier" is such an awesome trick, why don't we just print a trillion dollars an hour and make everyone rich? The reaction he got from the traders was very heartening. Real people not getting a government check understand the awful implications.

The CNBC crew asked Santelli if he'd like to take the disputed Illinois Senate seat. His response was top-notch: "You could never get me to go to Washington. I wouldn't want to have to take a shower every hour."

Incidentally, Rush also played audio of Larry Summers proudly proclaiming himself "Keynesian". I won't call myself an "expert", but I don't think even Keynes was a "Keynesian". But there we have it. Top Mugabe, errr, Obama economic advisor proudly admits that he's a believer in government-knows-best, central planning, stagflation inducing, ruin. All the potentially effective tools at their disposal, and all they can think about is the orgiastic spree they're going to have because in 1936 this guy came up with a theory suggesting that government spending might be an effective counter-cyclical measure, which he himself acknowledged might be full of holes. Gold, the TBTs, and/or, as Dennis Gartman reiterated last week, anything that "when you drop it on your foot, it hurts".

Cramer Nails It Again

Jim Cramer today made one of his best remarks ever on a matter not strictly investment-related. He told that idiot Mike Barnacle that if our Crack Dealer In-Chief, Barack Mugabe, really cared about fixing the economy, he'd call Ben Bernanke into the Oval Office and say "Ben, what should I do?".

Part of the significance of this lies in the fact that Cramer (again, I don't agree with him on a lot of things, but at least he isn't going to try to force me to admit that the sun sets in the east) was a famously outspoken critic of Mr. Bernanke in 2007. Nevertheless, he acknowledges the Fed Chairman's particular expertise in Great Depression Studies (did he get free Prozac for that?), and his deft handling of our financial crisis from a monetary standpoint.

I can't help noting that this remark came in the context of idiot Barnacle's hectoring of Cramer regarding why Wall Street can't rally in support of recovery and the good ole USofA. Cramer told him flat-out it's because there's nothing to rally about - this administration acts like it doesn't have a clue. Remember, Cramer is a self-identified Dem.

The Lilly Ledbetter Fair Pay Act

This is yet another example of why I have zero confidence that President Hope-a-Dope cares the least little bit about putting people back to work and liberating them from government subsidies. The only people it will put to work are lawyers. This job-killing abomination pre-empts state statutes of limitations (typically 180-300 days following termination, with many exceptions) on suits alleging gender or racial discrimination, and extends them to twenty years!As Steve Forbes remarks: "Can the President please show us how this incentive for costly lawsuit abuse aids future job creation?"

Larry Kudlow Is Keeping Track

Larry the K notes that since election day, the "stock market" is down 25%, and gold is up 35%. On a related note, from Forbes:

A more urgent question is that as Uncle Sam continues to spend its way out of the national mess, will the Chinese still accept a 2.9% yield on ten-year Treasurys?

I could be wrong (obviously!), but I'm still thinking that going ultra-short treasuries is the way to score big going out a few years. Better than gold, better than trying to bottom-fish financials or real estate.

There Were Giants In Those Days (Part 2)

A little more than a hundred years after Mr. Chief Justice Marshall's immortal quip regarding the power to tax, the great economist John Maynard Keynes expounded his epochal General Theory, and his timing was providential, from a certain point of view. It was the middle of the Great Depression, and the New Deal was in full flower. The New Dealers, recall, were a tribe of Utopian dreamers and schemers, with visions of agricultural collectives and nationalized utilities dancing in their heads. Among other things, they actually believed that the G.D. was caused by low wages (you read that correctly) and cash hoarding. Many had made the pilgrimage to Josef Stalin's paradise to gain their inspiration. All believed unreservedly in the capacity of enlightened, educated people (such as, well, themselves!), given enough authority and money, to fix the world. Certainly, modesty was not their hallmark.

You can imagine their delight when Lord Keynes revealed the Gospel of Aggregate Demand. The government, you see, can pull the economy out of a slump by taking it upon itself to boost aggregate demand! How to do this? A magic wand? A magic bullet? No. It's much simpler than that. All you need to do is organize useful projects and hire the unemployed to staff them. Where does the money come from? You borrow it. You see, sometimes the economy needs its "pump primed". You can pay off the debt later, once recovery kicks in, and the tax receipts come gushing. And did you know about the "multiplier"?

As you may now grasp, Lord Keynes' groundbreaking and brilliant (I mean that) work on aggregate demand provided the intellectual cover for busy-bodies and do-gooders throughout the land to congratulate themselves as they spent other peoples' money (or maybe even money that doesn't exist yet) on their pet schemes. Might there be shortcomings in this approach (see Today's History Lesson, infra, November 23, 2008), in the form of the long-run effects of taking on debt to pay for projects of unknown utility that private investors might have shunned? Sure, but the ever-insightful Keynes had an answer for that: "in the long run, we are all dead".

By the 1970s, the long-run had arrived, and, as he predicted, Lord Keynes had passed on. Efforts to manage the business cycle through manipulation of aggregate demand, however, were alive and well, though President Nixon's famous remark on the subject ("We are all Keynesians now") may have been an Ultimate Contrary Indicator. Nonetheless, Keynes' Cover had predictably led to social engineering through the tax code and other onerous regulations. Further, years of attempts to manage aggregate demand, and the widespread belief in the Phillips Curve (which held that there is an inherent and unbreakable link between inflation and unemployment such that more of one necessarily means less of the other) caused policymakers to accept more and more inflation in the hope of controlling unemployment. Once inflation inevitably got out of hand, interest rates skyrocketed, bringing high unemployment. This was the era of stagflation. The Phillips Curve was a dead letter, and many economists threw up their hands.

But the Two Giants, Reagan and Volker, had an plan. They would kill inflation through tight money (also suporting the dollar), and that, along with tax cuts and regulatory reform, would drive down unemployment. By the conventional wisdom of the Phillips Curve, this was an absurdity and bound to fail. But Keynes' aggregate demand model had some big holes in it, which the Two Giants recognized. First, Keynesian stimulus is effective only to the degree to which it is unexpected: to the degree markets see it coming, they learn to discount it in the form of higher interest rates. Second, the Keynesian model took no cognizance of the notion that perhaps government spending might be tinged with cronyism and other assorted inefficiencies that would undermine stimulus. Third, and most importantly to President Reagan, the Keynesian model took no cognizance of the role of incentives in economic life. Very simply, if you let people keep more of their money, and hassle them less, their appetite for risk will increase, as will overall economic activity. That this truism is even debated astounds me.

All of this seems common-sensical, and the results spoke for themselves. Yet these principles have been fought savagely, including by our current president, against all reason. Why? Simple. Ronald Reagan spoiled their fun. More money for tax payers and risk takers means less for "community organizers" to work their wonders. To the extent you put your faith in "economic activists", and the dreams of energetic people, you implicitly devalue the "contributions" of community organizers, government planners, social workers, political staffers, and the like. You've just told a lot of do-gooders that you don't think they do much good. Ouch!

To stand up against this type of entrenched interest, and to do so knowing that your approach would bring a brutal recession before causing the country to emerge much stronger than ever, is the definition of political courage. Current "leadership" could learn a lot, but won't. For reasons I'll delve into in the near future, our current president is constitutionally incapable of placing his faith in the dynamism of the American people. He will bitterly cling to the flat-earth creed of government knows best. He will be a failure.