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The Zealous Pursuit of State-Sponsored Collapse

by MN Gordon

Economic Prism

When Bakers Go Fishing

Government intervention into a nation’s economy is as foolish as attempting to control the sun’s rise and fall by law or force.  But that doesn’t mean governments don’t meddle each and every day with the best – and worst – of intentions.  The United States government is no exception.

Over the years, layers and layers of interference by various federal, state, and local agencies have built up like grime on a kitchen window.  The grease shines and smells of something fierce.  The layers of government grime also drip and ooze into every crack and crevice of the economy.

These days, for example, it’s impossible to carry out a simple private transaction with your barber or barista without some form of government interference.  Has your barber obtained the required license and paid the obligatory fees to be able to legally taper your neck line?  Has your barista’s espresso bean grinder passed city health inspection?

Is the hot cup of joe served in a paper cup of appropriate recycled material composition?  Did the hot beverage exceed the legally accepted temperature standard?  Did state and local governments receive their tax exaction upon payment?

When it comes to more complicated matters, where real money’s on the line, government interference is an absolute disgrace.  Did you know that it costs 10 times more to have an appendectomy in the United States than in Mexico?  Is the procedure 10 times better?

Obviously, this is nothing new.  Governments have been regulating and impressing their fingerprints all over commerce since society first granted its leaders the opportunity.  People are so accustomed to it that they accept government intervention as necessary to better living.

When it comes to price fixing, wage controls, and dictating oil production, things quickly go haywire.  This is because prices, wages, and resources have their own independent relationships beyond what can be legislated.  When the price of a certain good or commodity is artificially fixed below its natural equilibrium, scarcity and shortages follow.  In short, when the price of bread is decreed below the cost of the wheat that goes into it, bakers go fishing.

Credit Market Intervention

Perhaps the most nefarious of all government intervention, is that which directly affects a nation’s money stock.  Many people don’t recognize its occurrence.  But they do misdiagnose its effects.

Wage stagnation, for instance, is often blamed on greedy executives offshoring their production.  In reality, this is merely a consequence of a forced monetary regime that inhibits genuine capital formation and earned savings in favor of asset price inflation.  Of course, only a complete killjoy would bother scratching below the surface to uncover such minutiae.

Without question, the last decade has brought forth some of the craziest monetary policy experiments in human history.  If you recall, the Federal Reserve dropped the federal funds rate to near zero in December 2008, and kept it there until December 2015 – exactly seven years.  Since then, the Fed has raised the federal funds rate four times – 0.25 percent each time – bringing the federal funds rate up to 1.25 percent.

The Federal Open Market Committee (FOMC) meets on December 12 and 13, and will likely raise the federal funds rate another 0.25 percent.  It is also anticipated that the Fed will raise rates three times in 2018, assuming financial markets and the economy don’t breakdown before they can accomplish this.

Concurrent with the Fed’s interest rate raising efforts, they’ve also begun to reduce their balance sheet.  They’re selling some of the roughly $3.6 trillion in Treasury and mortgage-backed securities purchased as part of their Quantitative Easing program.  This reversal of the Federal Reserve’s Quantitative Easing program reduces the pool of available credit within the financial system.

It doesn’t take much imagination to visualize the effect this will have on an economy and financial markets that are wholly addicted to cheap and abundant credit.  So where does the GOP’s tax bill fall within this landscape?

The Zealous Pursuit of State-Sponsored Collapse

Here we turn to David Stockman, former Director of the Office of Management and Budget under President Reagan.  Stockman’s more than four decades of in-the-trenches experience, study, and contemplation of taxes, budgets, and deficits, and how these all influence and affect the economy, is unrivaled.  Stockman explains:

“All tax cuts are not created equal.  Their impact for good or ill depends on: (1) which taxes are cut; (2) how the revenue loss is financed; (3) when they occur in the business cycle; and (4) how they impact that nation’s underlying fiscal posture.

“Our point today is that the GOP gets an “F” on all four components of the test.  That’s because a deficit-financed tax cut is never a good idea, but is especially counter-productive if done late in the business cycle in the face of a structural deficit that is high and rising (owing to inexorable demographic pressures on entitlement spending); and in the teeth of an unprecedented cycle of monetary contraction, which is exactly what the Fed’s interest rate normalization and balance sheet shrinkage (QT or quantitative tightening) amounts to.”

To clarify, if you’ve been out of school for a while, “F” stands for fail.  Most notably, financing tax cuts with money borrowed from the future is doomed to fail.  Hence, the great GOP tax cuts represent but another fail milestone in the zealous pursuit of state-sponsored collapse.

As an aside, since last week, when we declared buying bitcoin above $11,000 to be an action for idiots, bitcoin has spiked up above $19,000.  That represents more than a 70 percent increase in just one week.  Nonetheless, we stand behind our claim.  We also stand behind our claim that sometimes idiots get rich.

[MN Gordon is Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.]

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