Paul Krugman was a False Prophet

Some claim that President Obama sacrificed restoring the economy to get Obamacare through Congress. Others claim that he didn’t sacrifice anything, that he really did not know what to do, and that Obamacare was simply a diversion. Neither have defined this time as it will eventually appear in the history books.

It wasn’t that he didn’t know what to do. It was the he believed so much the theory perpetrated by liberal economists like Paul Krugman that it was the Republicans who got it wrong in the Great Depression. They held back FDR from going BIG and from the ensuing undisputed greatness he would have achieved. The President believed these heathen prophets when they told him to spend trillions and then to hold tight and watch the miracle happen.

A diversion, perhaps….this magical incantation needed time to stew. Give the people bread in the Coliseum. They will be happy with the spectacle, You will be revered in History as the first President to have provided universal coverage, and in the mean time, these sorcerers of classical Keynesian economics will have the time to do what their earlier brethren were kept from accomplishing in history, prove Keynes RIGHT! A pithy seduction indeed….

It just so happens that their concoction was wrong. No stimulus, not even one several trillions large that would indebt America’s grandchildren and their grandchildren, could spend America’s way out of our credit collapse. It was a counterfeit messiah.

The President fervently thought his advisors had it right and that all that was needed was time. We see it all the time on American Idol and X Factor, these singers that come on stage believing to their depths that they can sing. And when the judges simply say no, these would be idols’ faces sink into the shock of disbelief.

QE1 was the initial song. QE2 was the singer begging to have a second shot at glory because he just knows he can do better. Now we have QE3. Its purpose is not to continue the classical effort. No that false dream is long over. Its sole goal now is to hold course until America fights its own way out of our depression in spite of our now $16 trillion-dollar debt. Its purpose is to take over the bread-feeding role and to appease the American public that all is ok through this election cycle. Its job is to somehow hold the West together until another crisis hopefully shocks us out of our stagnation.

So, not surprisingly, the President was caught off guard during the first debate by the weight of this reality. No matter….by round two, both actors were in fighting form and the hopes of America were restored. On to the election…

America’s Economy Can be Re-ignited Like a Boy Scout Fire

They say militaries inevitably prepare to fight their previous epic battles, sometimes lacking an understanding of how geopolitics and progressing cultures change the dynamics of the next war. If sophisticated, strategically centralized military planners continue to find themselves flat footed entering new wars, it should come as no surprise to find that Washington, as designed by our Constitution to be at battle with itself and the states, is utterly unprepared to execute war on our unprecedented flailing economy. By continuing to battle this historic monetary implosion as if it were a really big version of previous recessions, Washington has not only failed to aid the job recovery of our economy, it has actually dug an even deeper economic hole and has obtusely bludgeoned the American people for failing to crawl out from it.

This economy is neither a periodic mismatch between demand and supply as in previous recessions or a simple absence of demand that can be fixed by additional stimulus, low interest rates, or even lower taxes and regulations. Therefore, both the antiquated prescriptions being followed by this administration and the prescriptions of a bygone era being proposed by the Republican Party to win the confidence of the American people in 2012 will not fix our economy but will instead mire us in additional debt and will continue to sputter the economy to false starts and dismal failures.

If only those that would lead our country had been Boy Scouts! Boy Scouts practice their motto of “Be Prepared”, learning important skills of survival such as how to start a fire. As a lad, I was sent by my troop to endure a three day ordeal of survival before induction into the Order of the Arrow. The first night, I was given a match, a raw egg, a canteen of water, and a sleeping bag and sent into the wilderness. Because the night had turned frigid, my first order of business was to build a lean-to and to create the life saving warmth of a fire.

Now with only one match, it is critical to be prepared. Scouts first learn the basics that fire requires more than one match to burn. It needs additional heat, fuel and oxygen. After being taught the simple basics, Scouts delve into the intricacies of one match flame ignition. First, the Scout must find a sturdy, dry and protected environment that will be the base of the fire. The heat from the match must be ready to then ignite delicate kindling such as the under bark of a dead, dry tree. This delicate kindling must be given additional small twigs that snap at the touch. The gently resulting flames must have ample air yet be protected from erratic winds.

The Scout must be prepared to feed the fire with larger twigs at a rate that expands the reach of the flames without burning out rapidly and without smothering passageways of air that will support the nascent combustion. Afterword comes the traditional stacking of small limbs that keep the heat of the flame close yet that forces the aspiration of fuel and air into the mixture. Finally, the logs that will sustain the flame are placed strategically so that a majority of the logs will sense the flames flickering around them and will support air rushing in underneath to stoke the fire’s growth.

If the Scout is to be successful with just one match, he must be prepared to simultaneously manage all aspects of the fire’s preparation, lighting and combustion, and he must be ready to feed the fire once it bellows its life giving heat. The lighting of our nation’s economy is something akin to a Boy Scout’s preparation, lighting, and combustion of a Scout fire. If the manager’s of our economy’s restructuring do not ensure that all required aspects of an economic re-start are present and well dispersed to intricately interact with all its elements, the economy’s new flame will surely sputter like that of an unprepared campfire starter.

Just like the fire must have the proper balance of all three elements of combustion, heat, fuel and air to burn brightly, the re-lighting of the economy must have all three of its critical elements; sustainable debt, sufficient credit, and decentralized demand in simultaneous and sufficient quantities. When the match of economic stimulus is applied to the economy to light new jobs, if new workers are drowning in debt, their new incomes will simply support existing debts and will not spur economic growth.

Even if new workers’ incomes are sufficient to both pay their debt load and to increase additional demand, the impact of stimulus will be muted if their existing credit ratings will not allow them to take on additional debt, thereby increasing America’s money supply and expanding the economy. For any economic plan to be successful at re-flaming the economy, not only must stimulus be applied but our nation’s overhanging housing debt must be immediately reduced and our business and consumer credit must be immediately repaired.

However essential these basic elements of economic recovery are to restarting the economy, just like the Boy Scout fire, their application must be intricately and simultaneously intertwined to affect a delicate combustion from just one match of stimulus. America’s stimulus must flow through the dry, ignitable kindling of the domestic economy and be carefully protected from the erratic winds of globalization. The nation’s housing debt load must be swapped with bank equity to stack small limbs of economic growth near the economy’s fire base. Damaged credit ratings must be given amnesty to expose the limbs to economic oxygen. And our nation’s unemployed must be dispersed throughout the domestic small business economy through job vouchers to intricately mix the decentralized combustible fuel of demand with the oxygen of new credit and the heat of new debt capacity.

Just like the fire must be ready to accept additional limbs to grow its flames, the economy must be ready to respond to the initial turnaround with a growth oriented, business friendly, economic environment. Re-investment of offshore and captive capital into the domestic economy must be incentivized. A fair and consistent internationally competitive footing must be created so that businesses that combust in the early stages of economic recovery will be fed the competitive fuel to thrive in America through measures such as tax and regulatory reform, resizing of government debt load, investment in business infrastructure and modernized education.

Finally, a Boy Scout learns that a fire must be continuously attended, stoked, fueled and protected from the elements if it is to continue to provide life sustaining heat. Our nation has left its economic fire unattended for too long and must resolve to carry on the tradition of Scouting if we are to thrive once again. America should adopt the Boy Scouts’ motto and “Be prepared”.

Ben Bernanke Conducts an Economics Demonstration

Standing behind a lectern in front of a distinguished group of economists, Bernanke explains his maneuvers. He pulls out a good sized, clear glass vase and sets it atop the lectern, explaining, “This vase represents America’s monetary system. It seems empty but it is not. In fact it is full to the brim with air molecules. These molecules represent the Fed’s every day monetary function, creating money out of thin air and placing it in circulation. How much more monetary function do you think we could put into this vase?”

An economist raised his hand and said, “None I suppose. It seems the vase is pretty full of air right now.”

“Ah,” exclaimed Bernanke as he pulled out a bag of river stones. “But what if these river stones represented stimulus?” He neatly placed stones one atop the other till they filled the vase. “You see, we can fill this economy to the brim with stimulus and it does not overheat to create hyperinflation. But now that stimulus did not create the desired economic effects, is the vase full?”

A colleague raised his hand and stated, “It appears to be full but about to start emptying because the Chinese are beginning have stopped buying our short term debt.”

Bernanke determinedly remarked, “Yes but with unrest stirred up by an Arab Spring, a bit of European unruliness, and a horrific tsunami, we have a mixture for reserve currency absorption.” He then pulls out a jar of small round pebbles. “These pebbles represent Quantitative Easing.” With that, he pours the pebbles into the vase and begins to gently shake the vase letting the pebbles penetrate the crevices of the larger river stones until all have filled the empty spaces. “With quantitative easing, we are able to fill the longer tranches of debt, pushing out the treasury maturities beyond a year. Now does it look like our vase is full?”

“Seems so,” states a dissenting Fed board member. “The markets are now beginning to wane and more countries are beginning to question their holdings of U.S. dollars.”

“True!” exclaims Bernanke as he pulls out a pitcher of little steel BBs. “But what I have here is QE2.” With that, he pours the contents over the vase and gently shakes the BBs into the crevices between small pebbles and larger river stones, until the entire pitcher of BBs finds their way into the vase. “As you can see, I am able to push more and more of our nation’s debt into the out year treasuries, all the while propping up the markets, and yet we have no hyperinflation. Is the vase full now?”

“Definitely.” Remarks a marketeer as he reacts to Bernanke’s remarks that there will be no QE3 by pulling out of the market, sending it south. Sensing a potential slide into deflation, Bernanke reaches down under the lectern and pulls out a pitcher of sugary white fine Florida sand and begins to pour it over the vase, shaking the sand into the tiny crevices left in the vase, then waves his hand over the vase telling the market that interest rates will hover at zero for the next two years. “You see, I have more tricks up my sleeves. I call this Operation Twist. By this concurrent Fed and Treasury action, I can shove more and more of America’s debt way out into the treasury curve without hyperinflation.”

“But no one else is buying the debt and you are talking about creating even more debt by buying into the European’s crisis. Won’t this finally create hyperinflation?” shout the prime metal buyers as they watch the market tank and their metal prices dropping.

“Aha,” exclaims Bernanke gleefully as he pulls out his last pitcher containing crystal clear water which he promptly pours over vase and it seeps into the last known air pockets within the confines. “You see by packing the out years full of debt, I have effectively made more room in the early periods for a bit more room to conduct QE3. Call it by any name you want but the Fed will solidify Europe’s crisis and shore up America’s failing economy as long as I have space in the vase and the dollar does not hyper-inflate. To do otherwise would be to subject the banks to deflation and collapse.”

(Soooo…Europe may breathe a sigh as the can kicks further down the road, the markets may have a mini rally, the metals may trail off for a bit as other short term hedges seem a better bet, and then what? Your vase really does seem to be full now Dr. Bernanke.)