Thursday, November 8, 2012

What Now?

All right, all right. You can stop asking.

First, Barack Hussein Obama has retained the Oval Office for a single reason: More votes were tallied for him than against him. Why that's so, we might never know.

However, we can know where he'll try to take the nation:

  • Greater federal spending;
  • More federal intrusion into the economy;
  • An ever-increasing amount of redistributive activity.

This should be obvious. The consequences of those thrusts demand deeper thought.

Today, the federal government spends about 25% of our annual Gross Domestic Product. As many other commentators and analysts have noted elsewhere, that's about 6-7% above the historical peacetime average. Since tax revenues fall well short of the amount required, Washington must borrow the difference: more than $1 trillion per year, these past four years.

Private-sector growth has been anemic where it hasn't failed completely, resulting in an expanding pool of unemployed and underemployed Americans. Thus, we may expect the above pattern not merely to continue but to worsen: federal spending will be driven further upward by "compassionate needs," including bailouts for the most profligate state governments. This is an arc of a vicious circle, which will cause federal revenues to decline and borrowing to increase.

Trouble is, the pool of persons and institutions willing to lend to Washington has shrunk considerably. So the Federal Reserve Bank, the "lender of last resort," has been tapped to purchase the greater part of the Treasury bills issued to cover the debt: about 61% of all new T-bills issued when last I checked. It makes those purchases with newly created money, thus reducing the purchasing power of every previous dollar in existence.

This mechanism is simple enough for a child to understand. The purchasing power of the dollar -- i.e., its exchange-value in terms of real goods or services -- is inversely proportional to how many dollars exist. When a flood of newly created dollars reaches people's bank accounts, those who produce real goods or services find that the demand for them has increased. People with more dollars in their pockets tend to spend more; thus, under the prevailing rates of production of the things they want to buy, there's a "shortage." Despite the great flood of new dollars into the market, not everyone can purchase what he wants...or needs.

However, as any rational economist will tell you, there's no such thing as a "shortage" in absolute terms. A "shortage" of a good or service is a consequence of its price in dollars being set too low. So prices rise until the supply of goods and the demand for them, expressed in dollars, are once again in equilibrium.

Though to some Gentle Readers this reminder of how inflation really works will be unnecessary, not everyone is aware of the insidiousness of the mechanism by which Washington steals, not merely from our incomes, but from our savings as well.

That's not the only consequence of the Fed's purchase of T-bills with new money. Another -- quite an important one -- is a burgeoning climate of envy.

Psychology, said Robert A. Heinlein, is not a science for a simple reason: it's too difficult. Powerful minds gravitate toward fields where order is more easily found and exploited. In the obscure and variable reaches of the human psyche, order is maddeningly elusive. Thus, though we can see many patterns in human behavior, a degree of comprehension sufficient to make predictions about them -- falsifiable predictions that have measurements and time limits attached -- eludes us, and likely will continue to elude us into the indefinite future.

One of the patterns is the rapid growth of resentment of others' success, even though it has no connection to or bearing on our own. That surge of envy is the power behind all redistributive movements. It's irrational; the degree to which we respect and encourage one another to prosper is the best measure of our own success. Yet it pervades virtually every society on Earth.

The flow of the Fed's newly created dollars will not be uniform across all industries or demographics. Those that don't get quite as large a share of the swag as others will tend to focus enviously on the others, rather than on their own practices and how they might be improved. In truth, this can also be observed in pure capitalist economies with absolutely stable monies. However, inflationary economies display it to a far greater degree, because of the disconnect between the accumulation of dollar balances and the ability to satisfy one's wants with them.

As envy intensifies, so also do political pitches aimed at exploiting it.

Unless the GOP contingent in the House of Representatives succeeds in restraining federal spending -- a bet against heavy odds, given its past performance -- we can expect both an acceleration of dollar-deterioration via inflation and a corresponding surge in redistributive demands and political pandering to them.

Redistributive demands aren't all for direct government handouts. Some of them are for clamps on this or that segment of the economy: regulations to favor or inhibit certain businesses or practices; wage and price controls; imposition of monopolies or monopsonies by federal decree.

We've been hearing more about the cost of regulation as the years have slipped past. Many a conservative voice has been raised in support of cost/benefit rules to constrain regulatory activity. Though those voices diverge in many ways, they agree on the central point: Every regulation of production and commerce comes at a cost. Government cannot intrude into the market without incurring a price someone must pay.

Trouble is, Gentle Reader, the "someone" is usually you.

It could be an increment in taxes. After all, bureaucrats must be paid, or so they claim. So taxes might increase to cover the expansion of the federal payroll.

It could be an increase in the price of some good whose makers have been freshly regulated. Most regulations on production impose increased costs on the producer, after which he might well decide to pass that increment along to you the purchaser. Though for any good there is a price level at which it becomes unmarketable, the producer can only know when that level has been reached by reaching or exceeding it.

Or it could be a "shortage." This is the most common consequence of a price control: the imposition of a maximum retail price for a good or service. If the controlled price of item X is $5 per unit but its would-be purchasers are willing to pay $10, more persons will line up for item X than the supply of X will satisfy. They have the money, but they can't get the item. Nor will the supply of X increase to satisfy the excess demand, for the amount of X being produced resulted from an intersection of demand at $5 with the costs and difficulties of X production. New producers will not rush into the X market until the price is allowed to rise -- the very thing the price control prevents.

Wage controls, being merely price controls on labor, can be treated similarly.

Despite the perverse consequence of the deadly trio:

  • Greater federal spending;
  • More federal intrusion into the economy;
  • An ever-increasing amount of redistributive activity;

...all three will increase over time. Politicians love power and hate responsibility; thus, they tend to move in whatever direction maximizes the former and minimizes or eliminates the latter. Here you have explanation for why elected officials secretly love the profusion of unelected, faceless Civil-Service bureaucrats, despite all rhetoric to the contrary: The political class can blame an ever-greater fraction of the nation's woes on persons immune to popular displeasure, while taking credit for any gains, which the bureaucrat class cannot contest.

And so:

  • The increased redistributive efforts of the Obama Administration will be located within the "alphabet agencies."
  • The damage this wreaks on the American economy through swelling federal payrolls and other costs imposed on the private sector will be roundly decried by the very legislators and executives that mandated it.
  • "Reform" politicians will thunder against the regulatory burden. In many cases, the pictures they paint will contain a large amount of truth.
  • However, there will be no meaningful reform or restraint applied to the bureaucracies:
    • They're the indispensable engine of the Administration's redistributive efforts;
    • Their activity buys large numbers of votes, and in detectable blocs, at that;
    • Bureaucrats can be relied upon to vote for ever-larger government;
    • They create a villain against which the political class can rail until Kingdom Come.
  • Meanwhile, the volume of dollars in circulation will increase steadily, though the goods and services people seek to buy will often be in maddeningly short supply, if not completely absent from the marketplace.
  • The political class will shunt all blame for popular dissatisfaction onto the private sector by preference, and onto the regulatory agencies for second choice.

I counsel anyone concerned with the near and intermediate future to "brace for impact."

What, then, must we do?

  • Secure your wealth as well as you can: in precious metals; in stockpiles of tangible goods; and in any other medium that cannot be taxed or inflated away from you.
  • If you have any do-it-yourself skills, broaden and sharpen them; inflation will make every sort of specialist or tradesman ever more expensive.
  • Guard your health: the first sector to take a big hit will be medical products and services. If you've been deferring some desirable medical procedure because of inconvenience, distaste, or cost, bite the bullet and get it done.
  • Know and befriend your neighbors: the nearer they are, the more important this will be. Neighbors are the "barter economy" that can't be taxed and never goes away. Make sure they know that they can count on you for whatever you can do; they will reciprocate.
  • Know the local predators and prepare to deal with them -- harshly. He who's determined to take what you've rightfully earned or acquired deserves no mercy. You'll be pleasantly surprised at how many of your local police will approve of the sternest imaginable measures; after all, it reduces their workload.
  • Pray. It always helps; trust me on this.

On we go. Hopefully, not to Mark Butterworth's vision of a divided continent, but given America's demographics and the distribution of opinion, we cannot be sure. So be prepared -- and don't let your hopes cloud your perceptions or your reason.

"Stupidity is always a capital crime." -- Author unknown.
"So is privileging your fantasies over reality." -- Me.

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