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The Daily Reckoning | Monday, March 28, 2011 Spend less, employ more...regulate less, grow more...and more... Finding a spot of sunshine in the impending financial thunderstorm, Plus, Bill Bonner on Japan's Made-in-America "rainy day fund"... ------------------------------------------------------- Advertisement 60 Minutes Reports on Growing Body Parts Call it what you want: biotechnology, tissue engineering, cell therapy, regenerative medicine. The famous newsmagazine has reported on one doctor about to make multiple medical problems disappear forever. Lucky for you, that same doctor sits on the board of a $3.00 company that will bring these solutions to market - making shareholders rich in the process. Check out the 60 Minutes clip to learn the name. Wall Street Chihuahua Finding Financial Sunshine in the Midst of a Rainy Recovery Eric Fry Reporting from Laguna Beach, California... Investors always talk about bulls and bears...but no one ever talks about Chihuahuas. Maybe they should. The Chihuahua in your editor's household, "Tango," spends most of his time finding the warmest spot on the floor...and sitting there...until someone offers him food or some other enticing attraction. Tango doesn't worry about much of anything. When he's out and about, he trots along the sidewalk, darts in and out of the shrubs, chases after birds and generally enjoys himself. And when he's not out and about, he's lying on some sun-drenched floor tile. Tango doesn't fear much - not even much bigger dogs - but he's terrified of the rain. So when you add it all up, you get a happy-go- lucky little pooch who loves sunshine and hates rain. Investors could do worse than to "be a Chihuahua." Find the sunshine and repose...until the rain clouds begin gathering. Throughout most of the global financial atmosphere, the barometric pressure is dropping. Scattered clouds are encroaching upon what has been a delightful two-year run of warm, sunny weather. Japan is radioactive; the Middle East is hyperactive; and most of the Western world is insolvent. Thankfully, a few select companies are providing selective investment opportunities. But even selective investors must pay close attention to the clouds overhead. There aren't a lot of breezy cirrus clouds these days; it's all nimbus. The US economy is visibly slowing down, while the growth rates of places like China, India and Brazil are contracting. At the same time, the desperate financial conditions of countries like Ireland and Portugal - as well as states like California and Illinois - are retuning to the front pages. These are real crises, dear reader. Feels like time to avoid the rain...and to try finding the sun wherever you can. Here in the US, the economic recovery is providing very little legitimate sunshine. This so-called recovery is a tanning booth, powered by outrageously large and expensive "stimulus measures." Unfortunately, now that the stimulus dollars are spent, and vast portions of the real American economy have failed to revive as hoped, we Americans are left standing out in the rain with our fake tans...and no sign of sunshine anywhere. A quick foray through today's headlines tells the story... "Uncertainty Fuels Portugal's Financial Tailspin" "More Radioactive Water Spills at Japan Nuke Plan" "Disposable Incomes Drop For First Time Since September" ..and lastly, "Harry and David File for Bankruptcy." Yes, it's true; the gift-box retailer that began selling fruit by mail in the 1930s has filed for bankruptcy protection. Gift-box buyers - as well as "re- gifters" of gift boxes - will no longer be able to rely on Harry and David as their "go-to" present of last resort. Lost, temporarily, amidst these disturbing headlines is the even more disturbing fact that nations cannot spend their way to prosperity, no matter what clever name they slap on the escapade. From FDR's "New Deal" to Lyndon Johnsons' "Great Society" to Obama's "Build America Bonds," the programs follow a familiar path: spend first, ask questions never. There may be a better path, as guest columnist, Charles Kadlec, explains below... EXPOSED: The Biggest Scam In American History! Mad men drunk on power and driven by greed are robbing YOUR retirement! Most sickening of all, Washington fully endorses this bold-faced assault on your wealth. But Chris Mayer is exposing this scam in his brand new video presentation. PLUS, he'll show you how you could protect and even grow your wealth in spite of this scam, virtually spitting in the face of these elitist thieves. Don't be a helpless victim... Click here to act right now. The Daily Reckoning Presents Want to Create Jobs? Cut Government Spending Charles Kadlec Sometimes, the methods to produce results are counter-intuitive. For example, skillful pruning of grape vines is essential to the production of vineyards, and cutting back a rose bush promotes its growth. Based on experience, we can learn where cutting can lead to growth. The following statement is at first just as counter-intuitive: A reduction in government spending will not slow job growth. In fact, the experience of the last two years provides compelling evidence that a reduction in government spending will lead to increased employment and output in the US economy. Since 2008, annual federal spending less net interest has increased by $530 billion or 19%. Yet, even with February's welcome gain of 192,000 jobs, there are 2.3 million fewer people employed today than in February 2009, the month before the Obama Administration turned on the spending spigots with the passage of its economic recovery plan. Over those 24 months, private sector employment has declined by 2.0 million. In spite of the rapid expansion of the Federal bureaucracy, government sector employment has fallen by 360,000. Moreover, a comparison of these results to the recovery from the economic crisis of the early 1980s casts doubt on the Obama Administration's claim that without the unprecedented increase in government spending, the recession would have been even worse and the recovery slower. In December 1984, two years after the Reagan tax rate reductions began to take effect, the equivalent of 11 million more Americans were employed, including 10.6 million in the private sector, and 460,000 in the government sector. Bottom line, two years of record spending and deficits have produced a 13 million jobs gap when compared to the recovery from the economic crisis of the early 1980s. Why the abysmal results of the past two years? First and foremost, it is due to a utopian view of government largesse, which considers only the benefits, and none of the costs. Such a view ignores the underlying human phenomenon that produces economic activity. A job is produced when individuals enter into exchanges that lead to mutual gains. As a consequence, they work for each other. Each individual improves his or her own economic condition; incomes rise; new opportunities for mutually advantageous exchanges are created; the number of jobs expands. This basic economic proposition cannot be replicated by one-sided exchanges in which the government takes money from some, and gives it to others. Advocates of government spending tout the jobs created as a direct result of the expenditures, but ignore the jobs that are lost as resources are taken from the rest of the economy, either through taxes now, or through borrowing now and higher taxes in the future. Every dollar the government spends has to come from those who would otherwise have spent or invested their money in the private sector. To the extent the money is borrowed from non-US residents, the money can no longer be spent on exports or foreign investments in the US private sector. In either case, the net cash flow and net increase in demand generated by government spending is zero. However, the effects do not stop there. Since government spending is not based on mutually beneficial exchanges, it often is wasteful. By displacing the opportunities for wealth enhancing voluntary exchanges, wasteful spending further reduces employment and the overall wealth and income of the American people. For example, labeling government spending as "investments" in so-called "green-jobs" is just political spin to cover money-losing investments by elite government bureaucrats with none of their own money on the line who, nonetheless, believe they have an ability to pick winners. But, squandering money on expensive energy gambits reduces our wealth, and therefore shrinks the economy and the number of jobs. The path to more robust growth is first to stop doing what demonstrably has not worked for the past two years. As I wrote in "Toward a New Economic Consensus," studies by professors from Harvard to the London School of Economics are providing a growing body of empirical evidence that shows the combination of spending restraint and reductions in tax rates are the best ways to stimulate economic growth and employment. The Republican proposal to reduce 2011 spending by $61 billion is only a modest start, but at least headed in the correct direction. Such a "cut" would merely slow the estimated increase in Federal spending for 2011 to $300 billion, and represents less than 2 cents of every dollar of the $3.8 trillion the Federal government will spend this year. Given the failure of increased deficit spending to create jobs, the claim of several pundits that such a modest reduction in government spending would reduce employment by 700,000 jobs or more is simply preposterous. A second important step would be to prohibit any new regulations, and to get rid of as many useless or counterproductive government mandates as possible. Regulations prevent economic activity that otherwise would take place. And although many are aimed at helping the middle-class and those with lower incomes, new regulations on credit and debit cards are driving up the cost of consumer credit and leading to new fees on checking accounts with less than significant balances. The combination of lower government spending and fewer regulatory burdens would increase the space in which the American people could discover opportunities to create mutually beneficial exchanges. At the end of the day, those are the basis of economic activity, job creation, rising incomes, and an expanding tax base essential to restoring balance to federal, state and local budgets. Regards, Charles Kadlec, for The Daily Reckoning Joel's Note: Mr. Kadlec is a member of the Economic Advisory Board of the American Principles Project, an author and founder of the Community of Liberty. WARNING: This is Controversial. It Offends "Gloom and Doomers" Here's why it's NOT the end of America... Shocking new presentation reveals epic opportunities - viewer discretion advised for thin-skinned fear mongers. Watch the presentation right here. Bill Bonner Printing Money to Save the World Bill Bonner Reckoning from Baltimore, Maryland... The Dow rose 50 points on Friday. Gold rose too. As we ended the week, the Dow was over 12,000...gold was over 1,400...and oil was over $100. And all seemed to be headed up. But there's trouble afoot. Housing in the US, the foundation of most household wealth in the country, has gone into a double dip...which could drag millions more homeowners underwater. In other words, the speculative markets are moving one way. The economy is moving the other. The markets are going up. The economy is going down. Oh...and you can imagine what this does to the poor householder. He's caught in the middle. The real economy pushes the value of his main asset down...while the feds push up the cost of his most important supplies - food and energy. "Don't worry about it," says Bernanke, Geithner et al. The economy is recovering. But is it? Nah... It's going to turn out very, very badly. As predicted here, the feds' easy money is making things much harder for most people. It's pushing up costs...and prices. The feds can tell American households that the inflation rate is under 2%, but the poor consumer knows better. He knows that his real cost of living is going up at a rate probably more than 5%. Maybe, as John Williams tells us, more like 9%. So, thanks to the feds' pro-inflation policies, the consumer can't buy as much stuff...so stores don't sell as much stuff...and the economy weakens. And then, what do the feds do? They push even more inflation into the system. This is not going to end well. Inflation is increasing...while inflation expectations are still low. Sometime in the future...inflation expectations will get ahead of inflation. And then, the Fed, if it is to get control of the situation, will have to put rates up above the real rate of inflation. In other words, the Fed will have to get ahead of inflation. Is that going to happen? Not likely. Not in an economy that is slumping. And more thoughts along the same line... We love Japan. Yes. Count on the Japanese to do things that are both great and horrible at the same time. To put the following news item in perspective, the Japanese are in even worse straits than Americans, at least in some ways. Their government debt equals 220% of GDP. Savings rates are falling to zero. The annual government budget dwarfs tax receipts. And the Japanese face a huge bill for rebuilding after the earthquake, the most expensive natural catastrophe in history. Where are they going to get the money? Well, there are two possibilities. The first is bad for Japan. The second is bad for the US. Like the US, Japan can print its way out of the problem. Some Japanese officials are all for it. Others aren't. Bloomberg has the report: Bank of Japan Governor Masaaki Shirakawa is under fire for refusing to consider 1930s-style purchases of government bonds to fund reconstruction from the nation's record earthquake. Shirakawa repeatedly attempted to quash direct buying of government debt, a step allowed in extraordinary circumstances with the permission of the Diet, in appearances before lawmakers this week. The policy would undermine confidence in the yen and provoke a surge in consumer prices, he said at parliamentary fiscal and finance committee hearings. "If this isn't a special situation, what is?" Kozo Yamamoto, a Diet member with the opposition Liberal Democratic Party, said in an interview this week. Yamamoto advocated a 20 trillion yen ($247 billion) reconstruction program funded by BOJ debt purchases. A group of ruling-party lawmakers submitted a similar proposal to Finance Minister Yoshihiko Noda on March 18, according to a web log posting by DPJ member Yoichi Kaneko. The debate parallels discussions last year in the US and Europe, where the Federal Reserve and European Central Bank adopted bond-buying programs. The report mentions how Japan paid for its military build-up in the '30s. It printed money! Eventually this led to runaway inflation...and economic as well as military disaster. But what's the choice? Well, there's another option: Japan should dip into its "rainy day fund," say economists Carmen and Vincent Reinhart. While the Japanese bought Japanese government debt, the Japanese government bought the debt of other governments - primarily, the USA. Now, it has about a trillion dollars' worth of it. Why not just sell some of it in order to rebuild the country? Well, yes... But then, you see the problem, don't you, Dear Reader? What happens to the price of US government debt? It goes down, right? And then the US has a hard time funding its deficits. But wait. It can print money too. Oh joy...we're saved! Regards, Bill Bonner for The Daily Reckoning