Sir, I completely agree in particular with this sentiment, but also with your overall post. I also appreciated how you briefly touched on the repeal of the Glass-Steagall Act via the Gramm-Leach-Bliley Act, and the damage it's wrought on the financial industry.
Government interference in everything from the banking industry to the real estate industry has resulted in our current situation, and yet our stupid government stupidly thinks more government interference is the only thing that will save us. Stupid is as stupid does, I suppose.
Hi,
This came in today, part of a report I get called Casey's Daily dispatch. Thought you might appreciate it.
regards,
5412
Lessons Not Learned
Dear Reader,
This morning, Steve Hanke, professor of Applied Economics at John Hopkins University and a senior fellow at the Cato Institute, sent me his latest article for GlobeAsia, titled "Hu vs. Sarkozy." In it, he contrasts the socialist president of France with the rather more capitalist attitude of China's leader.
His theme - that the more a government meddles, the more it retards economic recovery - will strike no new chords with you, dear reader. Yet his concise language and clarity of thought in setting the historical context for where we are in the current crisis is well worth a quick read. And I quote:
Just reflect for a moment on the most frequently repeated lessons drawn from the Great Depression (1929-33). According to most accounts, the stock market crash of October 1929 was the spark that sent the economy spiraling downward. How could this be? After all, by November 1929, the stock market had started to recover, and by mid-April 1930, it had reached its pre-crash level. Contrary to the received wisdom, massive government failure - not the stock market crash - pushed the United States into the Great Depression. It was the Federal Reserve that ushered in that terrible nightmare. During the course of the Great Depression, the money supply contracted by 25%. This sent the economy into a deflationary death spiral, with the price level falling 25%.
The Federal Reserve was not the only culprit. In the name of saving jobs, the Smoot-Hawley trade bill became law in June 1930. That intervention increased U.S. tariffs by over 50%. It was quickly followed by the imposition of retaliatory tariffs in 60 other countries. In consequence, world trade collapsed and the unemployment rate in the U.S. surged from 7.8% in June 1930 to 24.7% in 1933.
In addition to the Smoot-Hawley tariff wedge, the Hoover administration and the Democratic Congress imposed the largest tax increase in U.S. history, with the top tax rate on income jumping from 25% to 63% in 1932. If these government policies weren't destructive enough, the Roosevelt administration's New Deal created regime uncertainty because major policies were being changed so rapidly. As a result, investors were afraid to commit funds to new projects and private investment collapsed.
Far from saving the patient, government intervention came close to killing it. But you wouldn't know it from listening to the current discourse about the Panic of 2008-09. Indeed, politicians and pundits throughout the world have unfortunately dialed back to the Great Depression and drawn on the false lessons of history for policy guidance and justifications for their mega-interventions.
David again. With that history lesson in mind, let's do a quick tally of how things now stand, shall we?
The Fed. Once again, the Fed is right in the middle of things - but this time around energetically expanding the monetary base in the hope that it will fix all that ails.
As you look at the chart of the monetary base just below, you'll see that after an initial round of explosive growth, the Fed slowed things down a bit. Interestingly, however, the latest data show the resumption of a steep upwards trajectory. This can be attributed to the Fed attempting to keep mortgage rates down -- and therefore the housing market from a final smack-down -- through accelerated purchasing of massive quantities of mortgage-backed securities. Regardless, whichever way you look at it, this is intervention writ large.
Taxes. Even without the slate of new and proposed taxes already in the works, simply allowing the Bush tax cuts to expire next year represents one of the largest tax increases in U.S. history. According to the Heritage Foundation, the resulting increase in tax bills will ring in at $2.4 trillion. Have a nice day, because next year the taxes on all your nice days are going up.
Trade Wars. To date, the administration has poured cement into the free-trade bucket through the "Buy American" provisions of the stimulus package and, more recently, tariffs on Chinese products. And, by doing so, it has set an easy-to-understand example for the world to emulate.
Far more potentially damaging, however, has been the deliberate decision to sacrifice the dollar in an effort to avoid the crash-bang-value discovery that would have occurred had the market been allowed its hard crash. As things now stand, we have the Chinese matching our dollar decline step by step, causing other export-reliant countries to follow suit or to begin making angry noises about fair play and the need to level the playing field.
In short, the U.S. government's competitive currency devaluation is moving the world briskly down the road toward the same raising of trade barricades engendered by Mssrs. Smoot and Hawley.
Legislative Limbo. From trying to kick-start a dying, union-dominated, heavy manufacturing industry. to padding the nests of some Wall Street brights while stripping those of others. to micro-adjusting bank fees. to playing doctor. to trying to legislate global climate. to. to. it becomes near impossible for even the most attentive investor to know where things stand and therefore, how to invest.
Sell my coal stocks? Buy nuclear? Or sell nuclear and buy ethanol? Invest in car companies, or steer clear because without Uncle Sam they'll fail anyway? But what if the good uncle continues giving? Then again, how long can Uncle Sam keep giving? And where's he going to get the money from? Buy real estate? But what if interest rates rise due to all the money being thrown about willy-nilly? Short commercial real estate? Or buy because the feds will step in, wallets open? Arrgh. ugh. gads!
I have, on occasion, been accused of being overly negative on the near-term outlook of the U.S. economy. I confess to that attitude, but only because unless and until the government stops pushing forward its latest round of economic "assistance," topped off with a large dollop of regulatory "relief," the way forward for the U.S. economy seems destined to first taking several steps back -- back to a point where the lessons of the Great Depression are once again learned.
In the meantime, we have to grab for what straws we can - prominently including precious metals, which will benefit as the dollar weakens, as it must, and which, held close to hand, have no counterparty liability. That and focusing on deep values in well-run companies, which, should you be unable to identify at any given moment, should leave you happy to remain liquid until such values again make themselves apparent
