The Source of High Inflation: Government Spending

http://www.oftwominds.com/blogoct12/govt-inflation10-12.html

Inflation is centered in particular markets - not finance, housing or small business, but wherever the government spends money: Schools, food, energy, medical care.

Howard Buffett, Warren's dad

http://www.zerohedge.com/article/howard-buffett-said-human-freedom-rests-gold-redeemable-money-called-return-gold-standard

A must read essay by Howard Buffett, father of the "legendary" investor who initially was so very much against derivatives then promptly changed his tune, discusses fiat money and gold, and concludes that "human freedom rests on gold redeemable money." In this stunningly simple, straightforward, and flawless analysis, Buffett's father stresses the relation between money and freedom and contends that without a redeemable currency, an individual's freedom and one's access to property is dependent on goodwill of politicians. Buffett also says that paper money systems generally collapse and result in economic chaos. He goes on to observe that a gold standard would restrict government spending and give people greater power over the public purse.

"Is there a connection between Human Freedom and A Gold Redeemable Money? At first glance it would seem that money belongs to the world of economics and human freedom to the political sphere. But when you recall that one of the first moves by Lenin, Mussolini and Hitler was to outlaw individual ownership of gold, you begin to sense that there may be some connection between money, redeemable in gold, and the rare prize known as human liberty. Also, when you find that Lenin declared and demonstrated that a sure way to overturn the existing social order and bring about communism was by printing press paper money, then again you are impressed with the possibility of a relationship between a gold-backed money and human freedom." His conclusion is eerily prophetic with what is happening with US society currently: "I warn you that politicians of both parties will oppose the restoration of gold, although they may outwardly seemingly favor it. Unless you are willing to surrender your children and your country to galloping inflation, war and slavery, then this cause demands your support. For if human liberty is to survive in America, we must win the battle to restore honest money."

Dan Norcini's commentary

There is no such thing as a jobless recovery, despite what the government spins. Either it's an economic recovery--or it's not.

Bonds are strangely higher today when one considers a yearly high in the S&P 500 and a general reflation trade. I have given up attempting to figure that market out as it is undoubtedly so heavily intervened in by the monetary authorities that the signals it gives off are dubious. One would think that with gold moving higher today and the Dollar lower that the last thing that would be moving higher is the bond market. After all, if the economy is so damned good that the equities can put in a yearly high leading one to believe the chatter that the Fed is moving towards draining excess liquidity because things are so peachy-keen, then why would money be flowing INTO and not OUT OF bonds.

In the meantime, don’t worry about a single thing – bankrupted states, financially impoverished towns, townships, counties and cities, falling tax revenues, chronically high underemployment rates and federal government spending that can only be described as a treacherous betrayal of the next generation of citizens – none of this is important – the only thing that matter is that the stock market is higher so all is well. Let the good times roll baby!

What's a billion?

A. A billion seconds ago it was 1959.

B. A billion minutes ago, the year was 1 A.D.

C. A billion hours ago our ancestors were living in the Stone Age.

D. A billion days ago no-one walked on the earth on two feet.

E. A billion dollars ago was only 8 hours and 20 minutes, at the rate our government is spending it.

What's a trillion? Don't ask.

Ben Bernanke and his predictions

Why are we still listening to these clowns in Washington? Despite their academic pedigree, accolades, and experience, they continue to be consistently wrong.

Here's the problem. If one assumes the earth is flat (due to anecdotal evidence suggesting said false assumption), then all subsequent conclusions will be equally false.

The achilles heel of mainstream economists: they believe the solution to a debt crisis is creation of more debt--that somehow deficit spending is stimulative. It is clearly a false premise--yet, our government officials insist we should accelerate our spending. It has never worked--and it will never work, as huge debts cap economic growth. Yet, here we are, contemplating multi-trillion dollar deficits.

Government spending does not stimulate the economy. It is a reallocation of capital away from the private sector, through taxation. It diverts money away from worthwhile investments toward unwise political choices which the private sector would not choose. According to James Turk,

...the private sector would be investing much of that money for the benefit of future growth and productivity. In contrast, although the government may call it ‘investing in the future’, it is simply spending money on politically motivated objectives, focused on consumption rather than investment.

Adding to government payrolls does not create enterprise value. Two Google founders created billions of dollars of market capitalization, as well as trillions in productivity growth. Two government employees merely occupy two cubicles, rather inefficiently.

More misleading government statistics

The Department of Commerce released Gross Domestic Product (GDP) growth statistics last week for the 2nd quarter ending June, and the numbers came in at "only" a 1% contraction, in contrast to the 1st quarter number which came in at a disastrous 6.4% decline. The contraction was smaller than what the Street expected, so markets rallied and the "green shoots" optimists came out celebrating that the recession had ended. The "getting less bad" argument was gaining traction. A couple thoughts gave me pause:

1) this GDP growth number is still negative. Sure, it's not AS negative but it still is negative. And since unemployment is a lagging indicator for economic growth, even if we are on our way to recovery, employment growth won't occur until 2010--at the earliest.

2) this aggregate number doesn't tell the full story. While overall GDP growth was only slightly negative, the private sector has experienced a much bigger decline. Why? Because all of the growth came from federal, state, and local government spending. The public sector is crowding out the private sector--the true engine of economic growth. More federal government employees were hired, while private industry was still laying off employees. That is not a long-term plan for success.

So while the GDP numbers were slightly encouraging (if still negative), I wouldn't start celebrating just yet. Meanwhile, I'm still long the market, but as soon as Congress returns from their summer recess later this month, I have a feeling Mr. Market will take away the punch bowl. Markets like it when Congress is not in session--they can't muck it up when they are idle.