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The Daily Reckoning | Thursday, April 15, 2010 Foreclosures hit record pace as "free lunch" economics takes its toll, A Keynesian-sponsored Greek tragedy headed for our fair shores, Last chance to grab discount seats at this year's Agora Financial Investment Symposium and more... ----------------------------------------------------------- The Multi-Trillion-Dollar Free Lunch Why government stimulus will only lead to economic famine Joel Bowman Reporting from Taipei, Taiwan... Milton Friedman got it wrong; there IS such a thing as a "free lunch." Just ask any mainstream economist. These folks relish the opportunity to beguile anyone - whether or not they are possessed of the time and inclination to listen - with a litany of magic public programs, all designed to serve up the gratis grub. The unspoken dilemma, alas, is that "free" lunches are usually so expensive that neither nation nor individual can ever reasonably hope to afford them. Invariably, as those in the European welfare utopia are lately discovering, "free" lunches often end up costing unsuspecting diners their breakfast and dinner money, too...just as the free-market economist had warned. Deficit spending...market meddling...price controls...subsidies...bailouts and boondoggles of every stripe... You name it; the teleconomist has an ill-conceived sermon for credulous acolytes everywhere. Let's start at the end of the beginning of the end... Having totally misread the very real crisis of overconfidence that propelled the US economy headlong into the current and ongoing economic correction in the first instance, would-be do-gooders and vote-buying politicians have since wasted no time in treating what they then misdiagnosed as a "crisis of confidence" in the markets. Their first mistake in treating the patient, as usual, was to ignore the fundamental precept of medicine: Primum non nocere. (First, do no harm.) More maniac with machete than surgeon with scalpel, Washington, DC has poured trillions of (taxpayer- and as-yet-unfunded) dollars worth of nonsense nostrum onto a wound that, for all intents and purposes, was self-inflicted. From the disastrous Troubled Asset Relief Program of the previous administration to the current administration's $862 billion stimulus package and beyond, it appears the spendthrifts on Capitol Hill know no bounds. Depending on where you get your figures, the stimulus syringe has thus far pumped some $10 trillion of elixir into the veins of the United States economy. And for what? Let's start with Obama's Jobs Program. His Organizing for America website, claims that the American Recovery and Reinvestment Act will "save or create 3.5 million new jobs." Even taking last month's goosed jobs report at face value (a generous concession given that, after accounting for birth/death "adjustments," temporary census jobs, "bad weather" and those magically disappearing "discouraged" workers, the economy actually LOST jobs), the unemployment rate is still officially hovering a shade below 10%. Unofficial figures - i.e., reliable ones, such as those from John Williams' Shadow Government Statistics - have it at more than twice that (21.7%). The same administration gloats that its new housing program "has stabilized the market, preventing more foreclosures and helping millions more re-finance at historically low mortgage rates." But data supplied by RealtyTrac shows that that foreclosure filings - default notices, scheduled auctions and bank repossessions - were reported on almost a million properties in the first quarter, a 7% increase from the previous quarter and a 16% increase from the first quarter of 2009. The Congressional Oversight Committee, charged with monitoring TARP activity, yesterday described the administration's Home Affordable Modification Program, which has a budget of $75 billion, as being totally ineffective. Meanwhile, as "subsidy program this" and "stimulus measure that" have failed abominably, the nation has run up record debts and deficits. The national debt stands today at an unprecedented $12.8 trillion dollars. That's over $41,000 per person, or more than $116,000 per taxpayer. Total Debt (including that held by individual households, businesses, financial institutions and local, state and federal government) now exceeds $55 trillion, or just over 180,000 per person. Unfunded liabilities (as yet unallocated funds to pay for Medicare, Social Security, etc.) are fast approaching $110 trillion. With total national assets weighing in at just $72 trillion, one might fairly say the United States is "underwater" on its loan obligations. Add in another 40 million Americans on food stamps and a debt-to-GDP ratio of 89% and the cost of a "free" lunch begins to look rather steep indeed. A thoughtful person might be forgiven for asking the obvious question here: Why is the government - i.e. the least productive institution in any economy - charged with the duty of stimulating anything? Everyone knows DC is a veritable cash vortex. When it comes to vacuuming scarce resources from those most in need, nothing sucks quite like bureaucracy. So how do they get away with it? Why are people sending in their tax dollars instead of rioting in the streets? Why do swindled citizens applaud trillions squandered on programs to buy small business cyanide and economy-sized nooses? The trick, as usual, lies in a carefully plotted economic public relations campaign. It's in the way these schemes are sold. As George Orwell once noted, "Advertising is the rattling of a stick inside a swill bucket." People seldom riot while waiting in line for a free lunch. Recognizing this, politicians and their lackey economists go about convincing people that a nation really can spend its way to riches. In this manner, the Keynesian economic theory of interventionalism enjoys a growing popularity among those it will eventually ravage. The hungry man will do well to remember, therefore, that the only thing a universal "free lunch" can reasonably guarantee is mass starvation. In today's essay, guest columnist Peter Schiff takes aim at the mascot of today's Keynesian throng and explains why following his advice will eventually lead to a Greek tragedy on American shores... The Daily Reckoning Presents Krugman Strikes Again PeterSchiff In a commentary a few weeks ago, I rebutted dangerously silly arguments put forward by New York Times columnist Paul Krugman about how the United States should pressure China to drop its support for the US dollar. Although there is far more happening in the world outside of Mr. Krugman's brain than within it, fresh drivel from the acclaimed Nobel Prize winner compels me to turn my focus there once again. In today's column, Krugman analyzes the Greek debt crisis, arguing that the best solution for Athens would be to simply inflate away its debt burden with printing press money. Krugman laments that this sensible option is being foreclosed by the monetary priggishness of the German heavyweights in the European Union, who are 'foolishly' seeking to prevent inflation and impose fiscal discipline. His theoretical justification is put forward in a familiar Keynesian recipe: deficit spending leads to inflation and growth, which leads to greater employment and rising GDP, which makes debt payments much easier to bear in relative terms. He laments that Greece does not control its own currency and is therefore unable to pursue such a policy on its own accord. He implores US policy makers, who do control their own monetary policy, to take heed of the danger and avoid such a course. In simple terms, Krugman believes that inflation is the best cure for burdensome debt problems. To prove his arguments, he points to the course followed by the Unites States in the decade after the Second World War. In 1946, due to unprecedented military spending during the war, US public debt as a percentage of GDP came in at a staggering 122 percent - which is even higher than the 113 percent currently weighing on Greece. Krugman endorses US policy at the time which, he claims, concentrated on fostering growth instead of taking measures to drastically cut the post-war debt. He notes that by the end of 1956, the federal debt had not diminished in nominal terms, but had become much easier to bear because of the decade of GDP growth that inflationary policies had created. He neglects to mention that during the five years from 1945 to 1949, federal spending dropped by 58% and taxes fell by 12%. Meanwhile, the budget deficit fell by 66% in 1946 and was in surplus from 1947 to 1949. In other words, although we did not pay down our nominal debt in the decade after the war, we did succeed in massively shrinking government and the burden that it places on society. Could it be that this had something to do with the post-war boom, or should we give all the credit to the monetary policy? (It is important to point out that our national debt did initially decline from 1945 to 1949, but the extra spending necessary to finance the Korean War reversed that trend.) Also, after the war ended, American factories quickly retooled production from military hardware to consumer goods. The products not only created a domestic boom in living standards, but were also in high demand in war-ravaged Europe. The late 1940's and 1950's produced some of the largest US trade surpluses (in relative terms) in our history. Today, government spending is rising at the fastest pace on record (not fast enough for Krugman) and our trade deficit is growing as well. In 2011, the government is forecast to spend $3.8 trillion. To truly replicate post-war fiscal policy, in the next four years: federal spending would have to be slashed by $2.1 trillion to $1.5 trillion, tax revenues would have to be lowered from $2.4 trillion to $2.1 trillion, and the federal budget would have to record a $650 billion surplus. Since Krugman would never support these spending and tax cuts, he must feel that similar success can be achieved solely through the monetary policy of inflation. In his column, Krugman warns that the biggest danger of the austerity measures necessary for Greece (and the United States) to pay down debt organically is the deflation that would ensue. Like most of his academic peers, Krugman believes that falling prices are the economic equivalent of kryptonite, guaranteed to bring low even the mightiest economy. He is wrong. We need deflation. As a result of a phony boom in assets, prices levels are still too high relative to the earning power and productivity of American workers. Falling prices will cushion the blow of recession (by allowing people to buy more with their paychecks and savings) and will eventually encourage people to spend when prices fall low enough. Deflation is the only way to save us from the much greater horror of inflation, or hyperinflation, which Krugman argues is not actually that bad. Inflation can't save us from lower real wages and falling living standards, it will simply change the manner in which we are impoverished. With deflation, workers' wages fall; with inflation, consumer prices rise. Deflation hurts, but inflation can spiral out of control, especially with an Administration addicted to spending. In Paul Krugman's world, deep structural problems can be solved simply by printing currency. I wonder whether he thinks all the Americans in debt should be given little basement printing presses to counterfeit away their troubles. Krugman's advice will appeal to his fans in government and academia, but won't help the average American. If we dare to follow his lead, a Greek tragedy will be played out in American garb. Peter Schiff for The Daily Reckoning Joel's Note: News just in is that we've secured Mr. Schiff as one of our guest speakers at this year's Agora Financial Investment Symposium, to be held in Vancouver between July 20-23. BUT... Early bird discounts end today, April 15. For a full, updated list of presenters and information on how you can join us, visit our webpage here. Alternatively, you can call: Opportunity Travel (formerly Agora Travel) at (800) 926-6575, or from outside the US (561) 243-6276. Peter Schiff is the president of Euro Pacific Capital and author of Crash Proof 2.0: How to Profit from the Economic Collapse. ----------------------------------------------------------- Bill Bonner, our intrepid Reckoner-in-Chief, is wandering around the mountains in Argentina today. He's promised to write again once he's made sure his high-altitude beef is ok... ----------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com