The U.S. Economy Paralyzed by Intervention and Manipulation

Hat tip to Zerohedge.com, Peter Schiff, and Jason Lewis

Given the absolute failure of all the intervention and manipulation of the (formerly) free market system by the federal government and the Federal Reserve, the Boston Federal Reserve is now floating the idea of permanently manipulating the monetary system via perpetual Quantitative Easing and perpetual zero interest rates. This willful negligence is setting the stage for inflation and the permanent devaluation of the U.S. Dollar. 

Meanwhile, the rich get richer and those of us living in the real economy continue to suffer. During the first quarter of this year, the stock market roared higher while virtually every economic indicator headed in the other direction.

• The Gross Domestic Product (GDP) was essentially zero! We saw massive inventory build-up (the largest since 2010) which boosted GDP by nearly 3.0%. Without this build-up, Q1 GDP would have been -2.5%. 
•  April PMI Manufacturing Flash Index at 54.2 biggest miss ever.
• New home sales tumbled by 11.1% – biggest drop since July of 2013. 
•  March Durable Goods was up slightly but less transportation, the index unexpectedly declined 0.2% (an indicator of a recession). 
•  April Service Sector PMI missed lowest expectations at 57.8 – the biggest miss ever. 
• Dallas Fed Manufacturing Survey recorded significant drop at -16 (biggest losing streak ever)

Negative economic news buoys the stock market because it removes fear of interest rate hikes. Weak economy means more cheap money which means higher stock prices.

http://www.zerohedge.com/news/2015-04-29/us-economy-grinds-halt-q1-gdp-tumbles-below-expectations-grows-only-02.

Why the Federal Reserve is Damaging America - Part I

I read and hear a lot about how bad the Federal Reserve is for America. The cries for “Audit the Fed” continue to grow louder. Inherently I understand that government intervention always causes market distortions in the market but trying to explain how the Federal Reserve detrimentally impacts the economy at a level that the average person can understand has proved daunting.

Below is a list of observations about the market with the Federal Reserve and what would happen without the Federal Reserve. Future blog posts will expand on many of these points.

With the Federal Reserve	Without the Federal Reserve
Unconstitutional government-granted monopoly on the creation of money. They fix the cost of credit.	No monopoly. Billions of transactions determine monetary policy.
Recessions and depressions linger for years as the Fed’s market manipulation interferes with free market principles – i.e. “Too Big to Fail”, zero interest rate.	Recessions and depressions self-correct with liquidation of bankrupt companies and industries.
Arbitrarily suppressed interest rates discourages savings, hurts those on fixed income, the poor, and savers. These artificial rates result in malinvestment by sending the  wrong signal to entrepreneurs to borrow at lower rates during a time when the economy may not support their expansion.	Interest rates determined in the marketplace comprised of billions of independent, voluntary transactions between millions of producers, consumers, workers, savers, investors, entrepreneurs and even speculators would return to normalized rates and encourage and reward savings. A large supply of savings would lower the interest rates offered by banks competing to make loans. Low rates send signal to entrepreneurs to borrow and invest in expansion.
Economy-wide booms and busts	No economy-wide booms and busts. Just typical localized and/or sector-specific business fluctuations
Artificially inflated stock market characterized by stock buybacks and dividend increases instead of productivity increases.	Stock market rewarded for future growth, productivity, and innovation.
Lending is suppressed. Why loan money at artificially low rates? Instead institutions seek higher yields and take more risk than otherwise necessary by taking the cheap money from the Fed and investing it in the stock market or other riskier vehicles – the carry trade.	Savings are used to finance business expansion. Depositors restrict current consumption (i.e. save) and business expands using the savings which is loaned to them. Lower consumption turns into more savings. Those saved dollars are then loaned out.
Central planning and crony capitalism.	Free market capitalism.
An unlimited amount of fiat money can be created out of thin air. No gold standard.	Sound money. Possibly backed by gold and/or silver, both of which are scarce, limited, and cannot be created out of thin air as they must be discovered, mined, and minted. They are rare, durable, portable, and divisible.
Bailouts	Bankruptcy
Inflation resulting from the increase in the money supply.	It is very difficult to increase the supply of gold and/or silver, therefore inflation is severely limited.
The welfare and warfare state are fully funded.	Neither would be financed to the insane levels they are currently as taxes would need to be raised to pay for each instead of printing money.

Lower Home Ownership is a Good Thing

The reason for the housing bubble in 2008 (which the economy still has not recovered) was due to subprime mortgages extended to borrowers without the financial means to make the mortgage payments. As these homeowners began to default on their loans, the derivatives into which those loans had been packaged began to lose value and the financial institutions that held those derivatives began to see their collective financial futures spiral into bankruptcy.

Back in the days with some semblance of sanity, with a less intrusive federal monetary apparatus, lenders required that borrowers make a down payment of 10%-20% of the loan amount. The lenders wanted the borrower to have some skin in the game. After all, how likely are you to stop making mortgage payments on a house in which you have $20,000, $50,000, or $100,000 of equity? Those who make no or low down payments have no financial incentive to stay in the house, therefore, foreclosures are more likely. 

Despite what leaders from both political parties have said over the years, home ownership is NOT for everyone.  The arguments for higher home ownership rates tend to revolve around the American Dream and fairness. These emotion-based arguments are null and void in the real world.

The American Dream does not include 0% down payment on the house of your dreams. The more accurate depiction of the American Dream, when it relates to home ownership, is you go to work for five years, save as much money as you can, and put down 20% on the purchase of your first house.

The fairness argument goes something like this: everyone should be able to buy a house regardless of income or ability to make their loan payments. This is nothing more than an intellectually lazy, politically correct way of avoiding having to participate in a debate on its merits. Anyone opposed to participating and advocating for another housing bubble is shouted down and called names. It’s like the global warming hoax. After all “the science was settled” and “the debate was over.”

Let’s be honest, the relatively high rate of home ownership in America is due largely to federal government’s intervention in the free market via the mortgage interest deduction. If that tax break was repealed, we just might become a nation of renters! 

http://www.cnsnews.com/news/article/terence-p-jeffrey/us-homeownership-rate-hits-20-year-low

Washington D.C. is Beyond Reform, Focus on Your State Elections

I have given up on the prospect that Washington, D.C. can be reformed. Since the founding of this nation, Washington has continued to grow at the direct expense of the people of the states. The founding fathers were afraid of this and developed a system of checks and balances to avoid it. Those checks and balances have failed leaving us with few options! Because of this, I believe the best use of American’s limited attention span toward politics and public policy is at the state level.

Consider the evidence against the federal government:

The executive and legislative branches are: overreaching, arrogant, waste-ridden, inefficient, unresponsive to their constituents, corrupt, controlled by special interests, obsessed with reelection, the architects of crony capitalism, irresponsible, unaccountable, out-of-control, and they break their own rules.

The judiciary: rather than interpreting the Constitution, it consistently legislates from the bench and creates constitutional rights out of thin air using their own, concocted precedence.

                   

The federal monetary authority (the Federal Reserve) is purposefully devaluing the dollar, causing inflation while leading the country into bankruptcy with their manipulation of the monetary system via perpetual zero interest rate policy and printing of dollars.

Describing the federal government as dysfunctional is being generous. 

They are willfully negligent in the exercise of their duties!

As we look ahead to the election in 2016, can you honestly say that there will be any significant differences between the two major political parties? Will a Hillary Clinton administration be materially different than a Jeb Bush administration? Even if Rand Paul were to win the presidency, we are still stuck with a corrupt and/or feckless Congress.

What’s the Solution?

The rightful remedy is for the states to unapologetically assume the role they were granted under the Constitution - that of a principal. The federal government is the subordinate agent of the states – NOT THE OTHER WAY AROUND! The states created the federal government and, presumably, the states can annul it or ignore it. 

As Ron Paul recently said, we will soon have "de facto secession." The federal government has gone too far and the American people are slowly waking up and recognizing it. The hand of the states has been forced. They must continue to nullify and ignore federal laws and regulations (over 200 bills are currently in the works) and move toward an Article V Convention of the States whereby the states bypass Congress and pass constitutional amendments.

What kind of gullible suckers are we to allow the federal government, which has a 100% failure rate, to dictate to us such things as the light bulbs and health insurance we are permitted to buy. Or the education of our children? Or our labor, environmental, drug enforcement, and gun control laws?   

This is the same federal leviathan that runs bankrupt entitlement programs such as Social Security, Medicare, and Medicaid! It operates bankrupt government-sponsored enterprises such as Fannie Mae and Freddie Mac! It funnels billions of dollars to bankrupt entities such as the USPS, Amtrak, and green energy companies! It runs the pitifully inadequate health care system at the Veteran’s Administration! It throws billions of dollars at “Too Big to Fail” financial companies!

Are we going to continue to be at the mercy of an incompetent and defective Federal Reserve whose track record, even when measured against its own mandate, is woeful. Are we going to allow them to continue to thwart efforts to open their books to a congressional audit?

Are you comfortable with leaving future generations holding the bag of an $18+ trillion national debt (over $100 trillion when you include unfunded liabilities for entitlement programs)?

James Madison said the states are “duty bound to interpose [intervene]” when the federal government goes awry. There are two obstacles to the states assuming their constitutional power. The first is the education and engagement of the general public. The majority of Americans pay more attention to the air pressure in the tires on their car than they do to politics and public policy. So we must awaken our fellow citizens from their apathy coma.

Secondly, the states must wean themselves off of the federal funding teat. On average, states receive 30% of their revenue through various forms of federal funding. Once the states are financially self-sufficient, they will no longer be susceptible to the extortion, coercion, and blackmail that the federal government relentlessly employs against them.

This country fought a revolution to rid itself of a tyrannical central power that did not represent the people. The states signed a contract (the Constitution) with the understanding that all power not specifically delegated in the contract to the federal government would reside with them. For over two hundred years, the pendulum has swung in the wrong direction as the power of the federal government has grown and that of the states has diminished.

My challenge to you is to pay close attention to your statewide elections rather than waste your energy and attention on the national elections. Support candidates in your state that understand the looming economic disaster. Support those who have read and understand the Constitution. Support those who understand states’ rights and are willing to flip off lawmakers and bureaucrats in Washington through nullification legislation and Convention of the States Applications. Support those that will go to work reducing your state's dependency on federal funds by cutting the budget, eliminating wasteful spending, and looking for opportunities to grow the states revenue base. Maybe that person is you?

The Wage Gap the Constitution and the Oscars

Actress Patricia Arquette made some interesting comments during and after the Oscars earlier this week. She blasted the Constitution for ignoring women and she expressed her disgust toward the entire country for a perceived wage gap between men and women.

How about we apply a little Pritical Thinking to the Arquette Rant?

The Perceived Wage Gap Between Men and Women

If women really did make 72% of what men make for the same work, wouldn’t all employers hire women first? After all, it would be much more economical? Basic economics would therefore dictate that the act of hiring only lower paid women would drive the pay rate down for men as well and, therefore, we would arrive at an equilibrium. So there must be more to it than Arquette's politically correct comments implied.

As Peter Schiff recently said on his podcast, “Women do not do the same work for less money. They do different work for less money.”  When women and men with similar experience and educational background do the same job, the wage gap all but disappears. It's called the free market! Could the rate of pay have something to do with lifestyle choices that women make to balance family with their career?

How do you explain women hiring managers, female owners of businesses, and female movie producers? Are they part of the conspiracy to pay women less? 

According to Genevieve Wood from the Daily Signal, "Twenty-something women without children, living in metropolitan areas, earn 8 percent more on average than their male counterparts, according to 2008 Census data. This is not surprising, since they’re better educated than their male counterparts.”

Did You Know - Liberal icon and likely Democratic nominee for President Hillary Clinton’s female Senate staffers were paid on average 27% less than her male staffers!

Did You Know – Different college majors lead to different careers and these varying careers have different pay scales? Of course you did! So when you see more women than men majoring in elementary education and more men than women majoring in engineering, you might be able to explain why, generally speaking, women earn less than men. It isn't because American society discriminates against them, it's because they are paid the going market rate for the job they are performing. 

In fairness to Arquette, she makes her living in Hollywood where male actors do make more, on average, than their female counterparts. Two words explain that: action films! They make more money than chick-flicks! That's life! Old guys can make action films well into their sixties and still draw decently at the box office (see The Expendables).

I do have a solution to the Hollywood problem: the overpaid male actors should give some of their pay to their female counterparts. They should pay their fair share! This is the same advice I would give to rich guys who advocate for higher taxes (i.e. Warren Buffett and Bill Gates). What is stopping them from voluntarily sending more of their income to the U.S. Treasury?

The Constitution

According to Arquette, the Constitution left women out and that explains why there is wage inequality 240 years later. Unfortunately for Arquette, the Constitution is gender-neutral.

Did you know - According to David Azerrad at the Daily Signal, “Women were voting in New Jersey at the time of the Founding! For the first time in recorded history, women voted alongside men in elections”?

Did You Know - the Constitution left voter eligibility up to the states!  

Did You Know - The 19th Amendment, GUARANTEED women the right to vote; it did not GIVE them that right?  “By the time it [the 19th Amendment] was ratified in 1920, more than three-fourths of the states already allowed women to vote in some or all elections.”