Centralized planning messes up an economy

Apr 27, 2011

Baltimore, Maryland

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Here's the report from the Fiscal Times:

For the first time since the Great Depression, households are receiving more income from the government than they are paying the government in taxes. The combination of more cash from various programs, called transfer payments, and lower taxes has been a double-barreled boost to consumers' buying power, while also blowing a hole in the deficit. The 1930s offer a cautionary tale: The only other time government income support exceeded taxes paid was from 1931 to 1936. That trend reversed in 1936, after a recovery was underway, and the economy fell back into a second leg of recession during 1937 and 1938.
Yes, dear reader...now we will give you a quote:

"Those who count on the feds for their daily bread will soon go hungry."

Who said that?

We did!

Yesterday, we saw that the feds' QE 2 program was a failure. Just like QE 1. And TALF. And TARP. Worldwide, the authorities committed about $20 trillion to fight the correction. And what has it bought? It bailed out Wall Street. It made more millionaires. It drove up stock prices - to a new post-crisis record yesterday. But it didn't really lead to a genuine recovery or a real increase the nation's wealth.

And we've got news for the 'post crisis' folks. This crisis is still going on. Now, we discover that not only is there no real recovery...the phony recovery is so distorting the political/ economic picture that no real recovery is even possible.

Seventy-nine percent of household income growth since 2007 has come from government transfer payments. People earn less real money. They have less real money to spend. They major asset - their houses - are going down in value.

And now they depend on the feds for more than half their income growth. Who's going to vote for less government spending now?

In all of history, there are very few examples where centralized economic planning has produced even plausibly positive results. They can mess up an economy; there's plenty of evidence of that. All their meddling, controlling, twisting - from Diocletian to Robespierre to Lenin to Nixon - every market regulation is a curse...every financial lifeline has a hangman's noose on the end of it.

The only counter examples we can think of are those on the Pharaonic model...where wise Pharaoh stored up grain during the fat years and released it to the people when times got tough.

How often did that happen? The only example we have is from the Old Testament. Is it fact? Or fiction?

A wise government today could imitate Pharaoh. But none has. Instead of storing up grain for the lean years, governments run budget deficits year in and year out...through good times and bad times. Then, when the pickins are slim, they run even bigger deficits to 'stimulate' a recovery.

This pattern has been in place...almost universally and with few exceptions... since the new money system was put in place in 1971. You remember that fateful day? When Richard Nixon interrupted 'Bonanza' to tell the world he was doing two impossibly stupid things at once - imposing wage/price controls...and taking gold out of the international monetary system.

We are still suffering the consequences...still lumbering, stumbling, clumsily padding our way to the final act.

And now look at Pharoah. The masses depend on him. And he's handing out bread. But wait...it's phony, ersatz grain. No kidding. Yes, the feds print up money...as if it were real. They give it to the banking system, claiming that it 'stimulates' the economy. Then, the banks give it back to the feds...so they can distribute it to the masses. Of course, anyone could see right through it. Everyone knows it is fraudulent.

And so, the price of gold goes up...

*** The insider hustlers game the system. Do you read that account of the Wall Street wives who started a company just to borrow money from the feds? Everyone in the press is bad-mouthing poor Christie and Susan. The two wives put up $15 million. They borrowed $220 million from the government giveaway program, TALF. They used the money to gamble on debt...just like the government wanted. And what if their speculations went bad? No problem, the feds took all the risk!

Well, more power to Christie and Susan. The feds wanted people to spend....to speculate...to invest. Well, Christie and Susan rose to the challenge. Besides, they're pretty.

Honestly, if Ben Bernanke looked like Julia Roberts, maybe we would have no problem with US central bank policy. We'd go happily to Hell...along with everyone else. That's how shallow we are! But he doesn't look like Julia Roberts. Not even close. So, we harp, carp, and kvetch....

And what we're complaining about today is the way the middle classes have been bamboozled by the feds, suborned by phony money...and ruined by a rigged economy.

Haven't they benefited from all those government payments? Yes, like a man benefits from a hanging! Keep reading...

*** Double Whammy from Flimmy Flammy

The combination of high food prices...and a high cost of gasoline...is hitting the middle classes hard. Whence cometh these high prices? Why, from the feds of course. Why would the feds want to hurt the middle classes? Don't ask silly questions, dear reader. Here's the AP report:
With gas prices now standing at about $3.90 a gallon, energy costs have now passed 6 percent of spending-a level that ...is a "tipping point" for consumers.

Of the six US recessions since 1970, all but the "9-11 year 2001 recession" have been linked to-of not triggered by-energy prices that crossed the 6 percent of personal consumption expenditures, he said. (During the shallow 2001 recession, energy prices had risen to about 5 percent of spending, which is higher than the long-term 4 percent share.)

What may make matters worse this time around, is there has been a steep increase in food prices that occurred as well. In other recent recessions food costs were benign, at between 7.5 percent and 7.8 percent of spending.

This year food prices have climbed 6.5 percent since the beginning of early January, according to Consumer Growth Partners.
*** Meanwhile, the poor middles classes watch as their most important asset gets marked down. Bloomberg is on the case:
April 26 (Bloomberg) -- Residential real-estate prices dropped in the 12 months to February by the most in more than a year, putting the market on the verge of eclipsing the nadir reached during the U.S. recession.

The S&P/Case-Shiller index of property values in 20 cities fell 3.3 percent from February 2010, the biggest year-over-year decline since November 2009, the group said today in New York. At 139.27, the gauge was just shy of the six-year low of 139.26 in April 2009, two months before the economic slump ended.

Values will probably keep falling as foreclosures swell the supply of unsold homes...
*** Oh you poor Daily Reckoning sufferer...relief is at hand! Yes, practical, sensible advice!

We've been right about almost everything.

We predicted the financial crisis in '07-'09...

...and the Great Correction...

And then we told you want to expect from the feds...

And how even their trillions in 'stimulus' would NOT bring genuine recovery...

'You can't make something out of nothing,' we said.

But many Dear Readers have wondered: what good is all this theory and abstract thinking? They wanted to know what to do with their money, now.

Well, here comes an old friend to the rescue. Mark Ford is a master at turning abstract thinking into practical, simple, actionable advice. He's been doing it for dozens of businesses for the last 35 years. Now, he's doing it for investors too.

In the April issue of his new 'Palm Beach Letter,' for example, he manages to distill about a million pages of Daily Reckoning canoodling, historical philosophizing, and macro-economic theorizing a into a single simple recommendation:

'Buy the Saint Gaudens $20 gold Double Eagle coins."

Good advice.

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

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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3 Responses to "Centralized planning messes up an economy"


Apr 27, 2011

It means simply buy gold coins and keep safe.


amit jha

Apr 27, 2011

Dear Bill,

Can you pls explain the last sentence about buying Saint Gaudens $20 gold Double Eagle coins.Coming from india i couldnt understand the meaning behind it...



Apr 27, 2011

Yes! it is so simple but absolutely true. However! who cares
for the middle class?Ben Bernake would again try his best to look like "Julia Roberts" more beautifuland bountiful too! Just like a lamp which "brightens up" before spreading pinch black darkness.Wall street "heroes are seeking further stimulus to continue their dance for longer. How much longer is anybody`s guess.....Welcome QE3.......followed of course by QE4...Just enjoy the ride till it lasts....tomorrow may be too dark to contemplate! But who cares?

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