Trouble in Paradise

March 31, 2009

March 30, 2009

All relationships hit rough patches.  There is no better proof of this than in our schools.  One day the happy young couple is oblivious to the rest of the world as they are lost in each other’s loving gaze.  By the next day, usually after the boy has done something stupid, all bets are off on whether the relationship was ever meant to be.  Yelling, screaming, and a blatant rejection of the boy’s physical advance are telltale signs that there is “trouble in paradise.”  Unfortunately, it seems the United States is playing the part of the boy in a similar scenario with its economic partners.

It is no secret that the Federal Reserve and/or the Treasury Department has printed or committed over $12 trillion to “stimulate” the economy.  Of course, no one should expect that the government is done with its spending binge.  All signs point to more massive expenditures, albeit in more creative ways, in the future.  Janet Yellen, president of the San Francisco Fed and a voting member of the U.S. central bank’s policy-setting Federal Open Market Committee in 2009, told the Forecasters Club of New York, “I’m convinced this is no time to relax our efforts.”  In fact, recently, Bernanke and his central economic planners, announced that the Fed would purchase (print money) more than $1.25 trillion in government bonds and mortgage backed securities – all in an effort to lower interest rates further, unfreeze credit markets, and get Americans to spend like drunken sailors again.  Naturally, the Keynesian’s believe this is the award winning recipe to produce a prosperous economy.  Apparently, they have not been paying attention to the world economy since the 1930s.

But, some folks have been paying attention to that economy for the last eighty years or so and know that the answer to solving our current crisis is not more of the same Keynesian policies that got us into this mess.  Ironically, some of these folks know more than our policymakers even though they come from traditionally command economy societies.  Take Czech Prime Minister and current European Union president, Mirek Topolanek for instance.  Last week, at an EU gathering he characterized U.S. government economic plans as “a road to hell” claiming that Washington’s massive stimulus packages and banking bailouts “will undermine the liquidity of the global financial market.”  According to Topolanek, “We need to read the history books and the lessons of history and the biggest success of the EU is the refusal to go this way.”  These remarks, coming from a man who use to live in a centrally planned society, speaks volumes about how Washington is pursuing the wrong course of action by attempting to spend our way out of the economic crisis.  In any event, the sharp comments of Toplanek may indicate trouble in paradise ahead for the U.S. and her European trading partners

The slights to U.S. economic policy did not stop there.  While Topolanek railed against overuse of the printing press by the Fed, the Chinese central bank proposed replacing the U.S. dollar as the international reserve currency with a new monetary unit not connected to any country.  The Chinese have become very concerned about what American inflation will do to the value of their assets ($800 billlion in reserves) and they are also sick and tired of the reckless fiscal and monetary policies of the U.S. government in the last year but also since President Nixon closed the gold window thirty-eight years ago.  It is obvious that Uncle Sam has become addicted to the Chinese financing our never ending debts.  This was made abundantly clear when Secretary of State Clinton practically begged the Chinese government to continue buying treasury bonds on a recent trip to that country.  Make no mistake about it, the Chinese have performed the role of enabler to the U.S. government’s spending sprees for some time.  Only now have they realized the peril they put their economy in doing so.  Given Washington’s penchant for spending and Beijing’s apprehension that the plan will work to revive the economy, the relationship between the world’s two superpowers seems to be headed for a falling out – trouble in paradise.

By agreeing to accept the U.S. dollar as the international reserve currency through the Bretton Woods agreements, the whole world essentially bought into a Ponzi scheme known as the U.S. government.  With authority granted by the U.S. government, the Federal Reserve Bank has always been there for us.  It has artificially lowered interest rates to keep phony booms from ending.  It has bailed out insolvent banks to protect our assets.  It has printed money and issued bonds to foreigners in order to preserve our standard of living.  Never mind that we have piled up a mountain of debt in the meantime.  Keynesians tell us that huge debts don’t matter anyway.  Tell that to our trading partners.  It might restore the peace and end the trouble in paradise.


It’s Washington’s Fault!

March 22, 2009

It never ceases to amaze me how the U.S. government can make a huge mistake, blame it on others, and have a large portion of the American people either believe it or just not care.  This past week, with grand theatrics, official Washington raised a huge fuss over the spending by AIG of $165 million of taxpayer bailout funds for bonuses to top executives.  On NBC’s Today Show Rep. Barney Frank, D-Mass charged that the decision by the economically impaired AIG to pay millions in executive bonuses amounts to “rewarding incompetence.”  On 60 Minutes, Fed chairman Ben Bernanke stated, “It makes me angry.  I slammed the phone more than a few times on discussing AIG.  It’s – it’s just absolutely – I understand why the American people are angry.”  House Speaker Nancy Pelosi assured the public that Congress was working on legislation that would correct this injustice quickly.  And of course the Administration weighed in with a guarantee that the financially feeble insurer would be forced to repay the U.S. taxpayers before it gets the next $30 billion from taxpayers approved on March 2.  All of this and several dozen quotes from lawmakers that all included the word “outrage” in its various conjugations and you have good theater coming out of Washington.

Let’s make one thing perfectly clear, if you are angry with AIG for using your hard earned tax dollars to pay millions out to incompetent executives in the form of bonuses then your ire is severely misplaced.  The “retention” bonuses were contractual agreements that had to be honored by AIG.  They were not performance bonuses like Congressman Frank through his “rewarding incompetence” remark would like us to believe.  They were bonuses paid to people who put in the time and effort to finish a task.  Under our system of government, contracts cannot be arbitrarily broken.  I give kudos to AIG for upholding that long standing American tradition.

Your anger and vengeance (peaceful of course through the ballot box) instead should be directed toward official Washington.  As we are all well aware, the Federal Reserve, Congress, and two administrations have been very generous with our money by giving huge amounts of it to many failed banks. Of course, they had neither the constitutional nor logical authority to do so.  The AIG bonus scandal is just the beginning of many to come because of the government’s reckless spending.   AIG has already given almost half of what it has received to Goldman Sacs and several foreign banks for financial obligations. Executives at other financial firms receiving bailout money have also been paid bonuses – these firms include Merrill Lynch and Morgan Stanley.  Fannie Mae, one of the largest culprits in the whole financial crisis, is expected to pay retention bonuses using taxpayer funds worth between $470,000 and $611,000.  Freddie Mac also has bonus plans not yet announced.  Citigroup is going to use $10 million of taxpayer funds to build a new office building and according to Rep. John Lewis, D-Ga at least 13 firms that have received or will receive taxpayer funds owe a total of more than $220 million in back taxes. These are the outrages we know of.  Certainly there will be more announced in the future.

Of course, if Washington had not appropriated the money in the first place we wouldn’t be talking about any of this.  As this columnist has maintained all along, these irresponsible firms should have been left to fail.  Bankruptcy would have been the efficient way to clean up the mess they made.  Mal-investment in the economy would have been avoided as productive firms would have purchased the good assets of the failed banks at market rates and taxpayers would not be on the hook for what will eventually amount to trillions of dollars in new debt spent on failed enterprises.  The integrity of the dollar and the future purchasing power of American consumers would have been preserved.  Yes, some folks would have suffered, but we are not supposed to be living in a communist society.  The government has no legal or moral right to take from one to give from another.  If that were true than why doesn’t Uncle Sam right the injustices to investors caused by Madoff and Stanford?

This week’s events in Washington amount to nothing more than a smokescreen by policymakers to cover their own butts.  They gave our money to AIG and did it with no strings attached.  Paulson, Bernanke, Geithner, Bush, Obama, and any member of Congress who has voted for these bailouts should be held to answer for their actions.  In terms of Congress, hopefully by the next election cycle there will be enough Americans who blame them and care enough to make that happen.

No “Change” in Education Policy Either

March 14, 2009
March 13, 2009

This past week President Obama made a major education speech in front of the U.S. Hispanic Chamber of Commerce.  In the speech Obama laid out his policy proposals for improving America’s schools.  The good news is that his plan, at least for now, proposes no new legislative initiatives.  The bad news is that the president did not propose to end Bush’s No Child Left Behind (NCLB) program.  Thus, the president of change is once again reneging on his campaign promise.Then there are the interventions for learning disabled students and English language learners that are needed if these students are to achieve high scores on the tests.  The problem is that NCLB does not allocate any funds for this purpose.  The program is essentially an unfunded mandate for the states.  Schools are held to high standards but are not given the resources by Uncle Sam to carry the mission out. 

This wouldn’t be so bad if our education system was in good shape.  The previous president was a Neanderthal in many ways including his views on education.  As a teacher myself, Bush’s NCLB legislation is one of the many reasons why I chose to teach abroad.  I can honestly say that I have never spoken to an education colleague that has any fondness for the program.  The reason is simple: the NCLB program is exactly the opposite of what we should be doing to prepare our students for the world of the future.

So what does NCLB mandate?  Essentially, the mandate is for schools to improve the academic achievement of their students.  That sounds fair enough, but the problem is that it seeks to measure this achievement through standardized testing.  What is wrong with this assessment approach since teachers have traditionally used tests to grade their students? Lots.  First of all, and this is from my personal experience and the experience of many of my colleagues, enormous pressure is placed on teachers from school administrators to constantly work to improve test scores because if schools do not improve scores there are strict penalties like a cut in funding or outright takeover of the school by federal and state officials.  Consequently, teachers have become test preparers instead of instructors of

critical thinking and problem solving skills.  The tests trump all beneficial features of a holistic education.  There is not enough time for field trips, music, the arts, and physical education because maximum time must be given to drill and kill exercises in math and English to prepare for the tests.

Lastly, NCLB provides for no consideration of other school issues like developing a school culture, addressing the emotional needs of children, and assimilating new immigrant students into the mainstream of the school.  For schools to be totally successful in carrying out their mission to provide a quality academic program, these issues must be addressed first.  The federal government’s program has it backwards – academic achievement measured by constantly improving test scores will develop a school’s culture, meet the emotional needs of all students, and assimilate new immigrant students into the mainstream of the school.  Anyone with a logical mind knows this is absurd.

Naturally, NCLB is not the whole problem with our education system.  The program is carried out by the Department of Education (DOE) and its $46 billion annual budget.  $46 billion dollars a year and the best this department of the federal government can do is give us an education policy that is better fit for the long gone Industrial Age than for the Information Age?  What we need is a new paradigm.  The teachers’ union dominated DOE is not the institution to provide it.  After all, the DOE has had 29 years to improve our education system and it has failed miserably.

Again the solution to our problems can be found in the private sector.  In 1999, Morton Egol, the managing director of Arthur Andersen’s School of the Future Program, gave an address that outlined the changes that were needed in the American education system.  He envisioned a system that moved away from the “mechanistic ways of working and organizing ourselves” to a system that instilled higher order thinking skills, creativity, self-directed learning with a collaborative foundation, and technology.  Somewhat radical in his approach, he rejected the “factory-like, assembly-line structure of schools” where “rigid grade levels and “fragmented” time slots prevailed.  Most of all he rejected the old system based on examinations which he claimed, rightly, contributed to squashing the love of learning and high dropout rates.  In its place, he proposed a dynamic system that provided the latest in computer technology for students to work in teams on real world issues.  Less than 2 years after Egol’s address, the Bush Administration put into law NCLB.  Fortunately, Egol’s legacy lives on at the Alameda Community Learning Center.

Obama had a golden opportunity to live up to his campaign mantra “Change We Can Believe IN” at least as far as education policy is concerned.  It would have been a no brainer to abolish NCLB.  In fact, if he was really for change, he would have scrapped NCLB, abolished the Department of Education, and returned education policy to the states and the people where it belongs under the 10th Amendment.  Given the teachers’ union’s stranglehold over the Democratic Party that is too much to expect.  I was just hoping for the demise of NCLB.

A little rebellion now and then is a good thing – Thomas Jefferson

The Dollar is Living on Borrowed Time, No Pun Intended

March 7, 2009
March 7, 2009

It seems that the title of this article is a cheap attempt to attract as many readers as possible.  However, anyone who is aware of current trends affecting the greenback’s future value knows that the title is more prophetic than cliché.  Yes, recently, the dollar has gotten relatively stronger against other currencies.  But, due to a combination of events (past, present, and future) this won’t last.  As a matter of fact, at some point in the future the dollar may need life-support to survive.

Life support?  Those are fairly harsh words you might say.  Well consider this, the standard definition of inflation is too many dollars chasing too few goods.  This week it was reported that unemployment hit a 25 year high at 8.1 percent.  If you include all the discouraged workers who have given up looking for work, like the government use to include in the rate, the number balloons to between 14 and 20 percent!  We have not seen these numbers since the 1930s.  It makes sense that this many unemployed workers will generally reduce national production of goods.  Combine this reduction due to unemployment with the trillions of new dollars the Fed and Treasury have injected into the economy in the last year and you have a recipe for a strong decline in the value of the dollar and much higher prices.


Chart of U.S. Unemployment

So, where has all that new money the government and central bank has injected into the economy gone?  The answer is into savings accounts and bank balance sheets.  Government figures show that the household savings rate jumped to 5 percent in January from 0 percent last spring – the highest rate since 1995.  Back in December, the cash reserves of banks in the U.S. increased to $774.4 billion from $604.7 billion in November and an incredible $2.39 billion in December 2007.  Thus, the new money along with trillions pulled out of the stock market sits on the sidelines and not in circulation where it would be making for higher prices.   At some point, when banks resume lending and consumers spend their savings on fewer goods, the deluge of cash into circulation will significantly debase the value of the dollar and cause an inflationary depression the likes of which we have never seen.

History tells us this scenario is not far-fetched.  Strapped for funds because of huge debts incurred by spending for World War I, the Weimar Republic experienced a deflationary collapse in the early 1920s.  As the German government printed new money to stimulate the economy, the mark actually appreciated against other foreign currencies for a while.  However, as additional debt mounted and the economy refused to improve, the German people lost faith in their currency and began spending billions of hoarded marks in the marketplace making for one of the most severe episodes of hyperinflation in modern economic history.  Sound familiar?  Replace spending for World War I with spending for a general warfare state and we have fulfilled three-quarters of the above scenario.  The only part left is the deluge of huge amounts of dollars back into circulation making for some level of hyperinflation.

Of course, Fed chairman Bernanke claims the Fed will be ready when recovery hits to sterilize the money supply and bring it down to an appropriate level.  But, how does he know what that level should be?  Will it be commensurate with the smaller economy we will have then?  The above scenario only takes into account domestic economic factors.  What about the foreign countries and nationals who hold dollar reserves?  Can it not be assumed they will act in their own self-interest?  Countries will spend dollars to stabilize their currencies and individuals will dump dollars to preserve their savings and spending power.  Lastly, the Fed induced Treasury bond bubble will burst expanding the Fed’s balance sheet and unleashing more dollars into the economy.  With all of these events working together, Bernanke will have a complex, high risk, long and drawn out job bringing the money supply into line with market needs.  At the end of the day, Fed policy caused our patient (the economy) to get sick; the Fed’s cure (spending) is killing it.  It won’t be long before our patient needs life support.