The Military Budget is Another Bubble

October 30, 2012

As students of the Austrian School of Economics understand, financial bubbles are caused by central bank monetary policy and government intervention in the economy.  The housing boom and subsequent crash in the first decade of this century is an excellent example of the Austrian Business Cycle Theory (the Austrian School’s explanation for booms and busts in the economy).

For more than 4 years between June of 2001 and September of 2005 the Federal Reserve kept its Federal Funds interest rate under 4 percent.  Artificially low mortgage rates resulted.  This coupled with large investments by the Bush Administration for low income homebuyers created the largest housing boom in American history.  As interest rates were gradually increased by the Fed, reaching a decade high of 5.25 percent in June 2006, investments in housing that were made at lower interest rates became unsustainable at higher rates.  As adjustable rate mortgage rates rose, defaults increased eventually causing home prices to plummet.  The housing bubble had burst.

Of course, pundits, politicians, mainstream economists, and others dependent on big government for their sustenance blamed the free market and deregulation for the housing boom and bust.  Yet, time and again in the Twentieth Century, from the stock market crash of 1929 to the dot com bubble of the late 1990s, the fingerprints of Fed manipulation and monetary price fixing have been all over every economic downturn and crisis.

Now, there are other bubbles in our economy that have yet to burst.  These are the bubbles that are insulated from bursting by politics.  They include higher education and defense spending.

In terms of defense spending, the political forces that protect it are currently working overtime to maintain that bubble.  In January, under provisions of the Budget Control Act of 2011, defense budget cuts totaling about $50 billion a year for the next 10 years go into effect.  Opponents of the cuts, like Senator Lindsey Graham are claiming “It would be like shooting yourself in the head. It would be the most destructive thing in the world.”  John McCain has even warned that the cuts would leave us unable to defend the country!

Then there are the threats of wide spread layoffs by defense contractors and the devastation to local communities like Newport News, Virginia that defense budget cuts would bring.  Corporate officials and community leaders have teamed up to decry the cuts based solely on the harm they would do to their bottom lines and tax bases without any regard for whether as a nation we should spend the money on more armaments.

After all, defense spending accounts for close to 20 percent of all federal spending.  The U.S. spends more on defense than the next 13 highest spending countries combined!

This enormous government bubble has been financed for years by deficit federal spending monetized by the Federal Reserve – in other words debt.  Since at least Reagan, military spending has been erroneously used as a fiscal stimulus to the economy, financing millions of jobs in the military-industrial complex.  And it has been used to launch several seemingly endless wars and other lethal adventures worldwide.

The country doesn’t need that much military and can no longer afford it.  As the real fiscal cliff approaches, political defenders of the military-industrial complex are going to find it more and more difficult to protect their bubble.  With hundreds of trillion of dollars in future unfunded liabilities on the books of the federal government, the only answer for Washington is to continue to print more money.  Eventually interest rates will rise increasing the interest payments on the debt.  More printing will occur perpetuating a financial spiral which will destroy what’s left of our economic system.  Cutting a measly $50 billion a year from military spending now should be a no-brainer.  But it probably won’t happen because anymore politics takes precedence over reason in Washington.

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina


It’s Not Nice to Fool the Free Market

October 13, 2012

The economic woes of California are back in the news yet again.  This time it is high gas prices.  Of course, the Golden State usually has the highest prices in the country, but recently prices at the pump have skyrocketed – increasing on average by 50 cents in the last week and reaching almost $6 a gallon in some areas of the state.

The senior senator from the state, Dianne Feinstein has predictably called on the Federal Trade Commission to investigate the possibility of price gouging.  She, like all statist politicians, doesn’t understand the workings of the free market. When their statist schemes backfire, they immediately blame the usual faceless enemies – unscrupulous suppliers, manipulators, and speculators.  Once again the public is being subjected to this tirade when as always the fault lies with Feinstein and her ilk.

You see, California, as this commentator has written before, has a crippling regulatory environment.  The environmental fringe has hijacked state government and squashed all reason and economic sense.   Gasoline suppliers outside the state are unable to ease the burden of short supplies in the state because they are not equipped to produce the cleaner-burning gasoline required by bureaucrats in Sacramento.

And there is a shortage of gasoline right now in California because the state has just enough refining capacity to fill its demand due to stiff environmental regulations.  When Exxon Mobil’s refinery near Los Angeles experienced a power failure which cut production and Chevron’s plant near San Francisco suffered a crude-processing unit shut down due to fire, supply was curtailed and prices rose drastically.

Thus, Feinstein’s faceless, nameless perpetrators of higher gasoline prices are non-existent.  The cause of higher gas prices in California is a lack of supply produced by the policies of statist politicians like her.

In fact, to increase supply the first thing Governor Jerry Brown did was order regulators to relax smog controls and allow refiners to begin, earlier than usual, producing cheaper winter-blend gasoline.  His actions are an acknowledgement of where the real problem lies – with government policy, not fictitious bogey men.

The free market, like nature, is an all-powerful force.  Human manipulation of either spells trouble.  Politicians will always blame someone else when their manipulations go astray.  Whether it is higher gas prices, housing market busts, or a drop in the value of the dollar, they point the finger at unscrupulous suppliers, manipulators, and speculators.  Instead they should look in a mirror and then point their fingers.

Article first published as It’s Not Nice to Fool the Free Market on Blogcritics.

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina

The So Called Presidential Debates are a Waste of Time

October 10, 2012

Like most Americans, I didn’t watch the staged media spectacle better known as the Presidential Debate.  It is not just because I didn’t have a dog in that fight; it is because to me the quadrennial political mini-series is nothing more than a rigged, wasteful use of an hour and a half of prime time television.

First of all, it is not really a debate but a glorified press conference.  Journalists hurl softball questions at the candidates giving each the opportunity to regurgitate their perfectly rehearsed sound bites.  Wouldn’t it be more worthwhile if Obama and Romney were allowed to go toe to toe by stating their positions, asking each other questions, and arguing the merits of their positions without any filtering from an aloof journalist moderator?  Better yet, wouldn’t it be more worthwhile if other candidates were allowed to participate and give Americans a chance to hear views other than the sanctioned Establishment line.

Then there is the fact that once again the major parties have nominated two candidates for president who are quite similar.  Whether it’s Social Security, corporate bailouts, endless wars, or government spending, Obama and Romney agree more than disagree on most issues.  Isn’t it time that other views besides the one that has gotten us into our economic mess, endless wars, and erosion of constitutional liberties be allowed to be heard?

Lastly, as is always the case in the debates, several important issues were totally avoided.  What about our military’s continued drone war that has left hundreds of civilians dead in Pakistan?  What about the failed War on Drugs that has made America the number one jailor in the world?  Okay, the first debate’s focus was domestic policy, so killing innocent foreigners was outside that realm, but the violence engendered, the lives ruined, and the constitutional liberties destroyed by Washington’s decades’ long insane drug policy could have been broached.

Then there was the avoidance of the gravest issue currently facing our country – namely the role the Federal Reserve plays in our economy.

“Give me control of a nation’s money and I care not who makes the laws.”

Mayer Amschel Rothschild, founding father of international finance (see below)

And yet, in an hour and a half debate on domestic policy, the Federal Reserve, Ben Bernanke, and quantitative easing were not mentioned a single time.  The Federal Reserve, the institution whose job it has been to protect the value of the dollar, has been responsible for the greenback losing 95 percent of its value since 1914.  Ben Bernanke, who has perhaps more influence over the economy than anyone else in Washington, doesn’t seem to have a clue about how the economy works.  He has a history of totally missing the mark with predictions.  This includes everything from, “At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained”, on March 28, 2007 to Fannie Mae and Freddie Mac, “…will make it through the storm” to his stating that “The Federal Reserve is not currently forecasting a recession” on January 10, 2008 as the economy was spiraling into a massive downturn.  These were not little misses.

But perhaps the greatest dereliction of presidential debate moderator Jim Lehrer in the debate was not asking the candidates anything about the Fed’s failed quantitative easing programs.  How can that be since Bernanke just announced that QE3 will last in perpetuity?

The Fed has already expanded the size of its balance sheet by 223 percent so far by buying financial assets from banks.  In so doing, it has injected trillions of dollars into the reserve accounts of those banks.  But, these purchases have not produced a healthy economy like Bernanke predicted.  In fact, Philadelphia Fed President Charles Plosser expressed a negative view of Bernanke policy recently when he indicated that, “Inflation is going to occur when excess reserves of this huge balance sheet begin to flow outside into the real economy”.  For his part, Bernanke has always maintained that he possesses the know-how and tools to siphon out excess liquidity to prevent inflation when the time comes.  But, Plosser doubts the Fed will be able to act boldly enough since it has “absolutely zero experience” unwinding what has been put in place.

Given the state of continuous quantitative easing that our economy has been subject to, its utter failure to accomplish its stated goal, and the dour forecast by the Philly Fed Chairman as to what will result, how was this not an important area of inquiry for Lehrer to pursue with Obama and Romney?

At the end of the day, the so-called presidential debates are a waste of time.  Run by the bipartisan Commission on Presidential Debates, no candidates other than their own Republican and Democratic nominees are permitted to participate.  Given that both are usually quite similar in their positions, the American people are provided with little choice.  Finally, because many critically important issues are avoided, the debates contribute very little to the national dialogue on what needs to happen to turn our country around.  For that hour and a half we would be better off if the networks had aired reruns of the most popular mini-series instead.

(Quoted by Senator Robert L. Owen, former Chairman of the Senate Committee on Banking and Currency and one of the sponsors of the Federal Reserve Act, National Economy and the Banking System, (Washington, D.C.: U.S. Government Printing Office, 1939), p. 99. This quotation could not be verified in a primary reference work. However, when one considers the life and accomplishments of the elder Rothschild, there can be little doubt that this sentiment was, in fact, his outlook and guiding principle)

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina