Why no one wants de-leveraging?

Feb 21, 2012

Buenos Aires, Argentina

If only Keynes had gone to Carnival!

Buenos Aires is hot and humid. We wilt. We slow down. We find it hard to breathe. It's like Maryland in the summer time

But the humid weather doesn't stop the partying.

We arrived at 2AM. A drum band was performing...amid shrieks of laughter...about a block away. It's Carnival time in South America, a rush of late night revelry before the party stops for Lent. Yesterday was a holiday; so is today.

The origin of the word 'carnival' means 'take out the meat.' Christians are supposed to give up meat for the 40 days preceding the crucifixion and resurrection of Christ, from Ash Wednesday to Easter Sunday. Fat Tuesday, or Mardi Gras, gives them a last chance to let loose...to eat and drink heartily...before the Lenten fast begins.

Pleasure is a greater temptation than pain, for most people. And the feast of Carnival was always much more agreeable than the abstinence and prayer of Lent that came after it. So it won't surprise you, Dear Reader, that people have tended to enjoy the debauch of Mardi Gras and forget the penance altogether.

Everybody wants the resurrection; nobody wants the crucifixion. Everybody wants recovery; nobody wants de-leveraging. Everybody wants to be born, but nobody wants to die.

John Maynard Keynes should have noticed. His idea was that the feds would run surpluses in the fat years and deficits in the lean years. But it ran onto the jagged shoals of human nature...the same animal spirits that animated the crowds outside our window last night. It doesn't take much self-discipline to run a deficit or to celebrate Carnival. Running a surplus...or fasting...is another matter. Carnival is easy. Lent is hard.

So, when the crisis of '07-'09 came, the feds had no money saved to counteract it. All they could do was to borrow...and make it worse.

"It was so much more tranquil in Nicaragua," Elizabeth remarked. "All we heard was the crashing surf at night. It was peaceful. There's nothing very restful about a steel drum band."

We left Baltimore about 10 days ago. We've stopped in Miami...Managua...San Jose and Panama City. Now, we're on the Rio Plata...in the Palermo Soho section of Buenos Aires.

"Did you see the Dollar Sniffers at the airport," asked a friend.

"The what?"

"The dogs. The police have trained dogs to be able to detect dollars in your luggage."

"Why would they do that?"

We've heard about the 'risk off' trades in Europe and America. Fearful investors forsake their Portuguese bonds and Chinese stocks for the relative safety of US dollars. But here, the safety of the dollar is a more tangible and more immediate concern.

"People are getting nervous again. The inflation rate is increasing. Nobody knows for sure. The government lies. And they threaten to put you in jail if you publish an alternative number.

"So people watch the prices for pizza and hamburgers. There's a pizza chain that sells the cheapest pizzas in Argentina, called "Uggi". It's so cheap you have to pay extra if you want a cardboard box. They put their prices right on the front of the store. So you can see immediately how much prices are going up. I think they're going up at about a 25% rate. More than 3 times faster than the government claims.

"We used to watch the price of a Big Mac combo, too. But the government put pressure on McDonalds to hold down the price...in exchange for some tax benefit or something.

"The Argentine economy is really very robust. It has to be. People have to find ways around all these stupid laws. They pass a law to prevent you from importing something because they want to 'protect' some local industry that the politicians have an interest in. Or they pass a law to prevent you from exporting something because they want to force you to sell it to local people at a low price.

"Those dollar-sniffing dogs, for example, are another way they try to keep people from protecting themselves from the government's inflation. They don't want people to convert their pesos into dollars...and then take them out of the country.

"They also make it hard for you to spend money. You have to show where you got the money. Otherwise, the seller is likely to denounce you to the police. So people are careful. They don't want to buy. They don't want to spend. What a way to run an economy!

"I've got a friend who sells Harley Davidsons. He has customers who want to buy them, but he can't get them. Because the government is trying to favor some other industry. And then they stopped you from importing tires...so you couldn't get tires for your car. That's why you see so many trucks with bald tires. It's dangerous. But it's just what you get when you start monkeying with an economy.

"That's why I like living down here. It's like an economic freak show. You get to see experiments...and the kind of grotesque results they produced. It also shows why Hayek was right. The free market is the only way you can get any honest information about what people really want...what they're willing to pay for...what's scarce and what's abundant. Freely-set prices have an 'information content' that guides the whole system and ends up making everyone better off.

"When the government interferes, prices lose their information content. They give misinformation instead. And you end up with the kind of mess you have here in Argentina. Which isn't that different from what you've got in Greece.

"It also looks like it is the way the US is going too.

"You know, 100 years ago, this was as rich as the US...or almost. This city was a rival to New York. Hundreds of thousands of immigrants came in...found jobs...built railroads...opera houses...restaurants...monuments. It looked like Argentina would become one of the world's leading industrial as well as agricultural powers.

"Instead, the country took a direction that nobody really wanted. I mean, nobody wanted Argentina to be a second-rate economy with a barely-functioning market economy. But that's what we've got. Because, as you would put it, the zombies got control of the government. Most of the voters were here in the city. And the Peron government realized that most of them could be bought...with giveaway programs and government jobs. The people voted for Carnival, you might say. They didn't vote for Lent.

"And once the system was corrupted - paying off the zombies by imposing more and more restrictions and taxes on the productive economy - there was no way to fix it. There were more zombies than producers. They won every election. They still do.

"The urban masses control the elections. And the urban masses want to be zombies - with public health, pensions, jobs, subsidized gas and electricity, and so forth. Here they even subsidize the price of a steak, by making it hard for ranchers to sell their beef on the open world market.

"And from what I read the paper, I think America is doing essentially the same thing...

"Also, in fairness I should say that Argentina is still a relatively agreeable place to live. The food's good. The people are generally very friendly. The weather is usually good too. And it's fun to watch people doing such wacky things...

"But it's a lot more fun to watch...obviously...if you have a bank account in Miami."

---------------------------------------- Have an enriching Saturday! ----------------------------------------

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*** Among America's most powerful zombies are those in its military industry. But if you read the papers, you'd think the swill was running low in the Pentagon trough. But it is not so.

Winslow Wheeler reports: Last Monday, after the Pentagon released its 2013 budget materials, just about every news article I read inaccurately reported the totals. These articles did not just miss some significant bits not in DOD's press release; they ignored another $380 billion in spending for US national security spending if you take the time to parse through OMB's far more complete and accurate budget materials.

The Pentagon's "base" budget for 2013 is to be $525.4 billion, and with $88.5 billion for the war in Afghanistan and elsewhere added, the total comes to $613.9 billion.

Indeed, if you plowed through the hundreds of pages of additional materials the Pentagon released Monday (at http://comptroller.defense.gov/budget.html), you would come up with little reason the doubt the accuracy of those numbers as the totality of what Secretary of Defense Leon Panetta was seeking for the Pentagon. It would also seem reasonable that those amounts constitute the vast majority of what America spends on "defense," defined generically.

You would be quite wrong to think so.

The Pentagon's "base" budget-i.e. the non-war parts-is not $525.4 billion; the formally presented Pentagon budget, as shown by the President and his Office of Management and Budget (OMB) is $6.3 billion higher, making a total of $531.7 billion.

Why isn't that slightly higher number reported by the press? Simple; it's not in the Pentagon press release. Even when told about the more complete materials at the OMB website (as I attempted to do), the press seems to unanimously prefer the lesser DOD version.

The additional $6.3 billion is for some military retirement and other military personnel costs that are every bit a part of the Department of Defense (DOD) budget as the rest of its personnel costs or any plane, tank or ship in the inventory. It's a part of the President's official budget request for the Department of Defense, and it's money appropriated by Congress, just like the rest. The only difference is that it is appropriated by a different mechanism. That mechanism is what OMB and others call "mandatory" spending, also known as "entitlement" spending, or as it was originally conceived, permanent appropriations as authorized by law.

You'll have to ask the Pentagon why its press releases are inaccurate to the tune of $6.3 billion. They might say that's the way they have always shown their budget to the press. They might say that they don't want to change now and present apples this year compared to last year's oranges. They might say they like to hide DOD costs, but I doubt they'll admit the latter.

They hide other DOD costs as well. There are other expenses for DOD military retirement and also for a part of the DOD healthcare system buried in other parts of the federal budget. You can find them in the budget requests for Health and Income Security. When you net out some intra-governmental transfers and other obscure budget-geek twists and turns, I calculate a total of $29.4 billion in 2013 for the expenditures for these DOD costs not shown in the DOD budget-and certainly not in the Pentagon's press releases, not ever.

If you want to be a stickler for detail and budgetary ethics (the latter not a particularly popular activity these days, if ever), the "base" Pentagon budget, is not $531.7 for 2013, it is $561.1 billion. It sure as heck is not the $525.4 billion the Pentagon press release and its avid readers in journalism have reported so profusely.

There is, of course, more. Technically not a part of the DOD budget, but certainly a generic defense cost are the warheads in the Pentagon's strategic nuclear delivery systems, like the B-2 bomber and the Minuteman and Trident missiles. Nuclear warhead research and upkeep are a Department of Energy cost; $19.4 billion in the 2013 budget.

There are also the costs for what OMB officially calls "defense-related activities" (the Selective Service, the National Defense Stockpile and other cats and dogs) that amount to $7.8 billion for 2013.

Done? Not yet.

Consider the $8.2 billion that the State Department wants to spend for the conflicts in Iraq and Afghanistan, which-like it or not-is a national security cost. And what of the rest of the State Department budget ($61.6 billion) for diplomacy, foreign aid, arms sales, aid to Israel and a lot more. Some Washington-types call this budget "soft power," and it is surely an important part of America's international security presence.

Consider also the human consequences of past and current wars that are born by our veterans and the Department of Veterans Affairs: add another $137.7 billion for 2013.

How about protection in the war on terrorism? The Department of Homeland Security and the homeland security expenses of various agencies not discussed here (such as the $4.1 billion being sought by the Department of Health and Human Services) are certainly a national security cost: add $46.3 billion for 2013.

Add all that together, and you get $930.6 billion.

But we're not quite done yet.

The Pentagon budget and all the other defense related spending have to be taken into account for our annual payment for the national debt. The net interest on the national debt for 2013 is to be $248 billion. All defense related spending for 2013 constitutes 25.7 percent of all federal expenditures ($3.8 trillion in 2013); 25.7 percent of the interest payment is $63.7 billion.

The total budget request for all US defense related spending in 2013 is $994.3 billion, by my calculations.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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2 Responses to "Why no one wants de-leveraging?"


Feb 22, 2012




surajit som

Feb 21, 2012

the truth is obvious: cook accounts as much as possible and then beyond.like in greece. why a country needs to spend one trillion dollar for defence ? who is going to attack it ? meanwhile the people groan under unemployment ,mortgage and debt. all countries are future greece. the tragedy(or farce) is that people cant borrow, government can as much as it wants !!! in the name of poeple .

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