Ruminations, June 14, 2009

What’s wrong with one party rule?

In Saddam Hussein’s Iraq, people could vote and they did. The trouble was that there was only one party and Saddam got 100 percent of the vote. There are places in the United States where the registration is so overwhelmingly one-sided, that it may as well be a one party state. Take Massachusetts, where Democrats outnumber Republicans 3-1.

Massachusetts Senator Ted Kennedy has served in the Senate since 1962. In 1969, Kennedy drove his car off a bridge, killing his passenger, a 28-year-old woman. Although a charge of vehicular homicide could have been made, no charges were ever issued. The Massachusetts voters? They re-elected Kennedy seven more times.

Former Massachusetts Congressman Gerry Studds was first elected to Congress in 1972. In 1983, Studds admitted to having a homosexual affair with a senate page who was a minor. When the House of Representatives reprimanded him, Studds stood with his back to Congress. The Massachusetts voters? They re-elected Studds six more times.

Massachusetts Congressman Barney Frank has served in Congress since 1981. In 1990, Frank admitted having an affair with a male prostitute and that the prostitute used Frank’s apartment for other gay clients. Frank was reprimanded by Congress. The Massachusetts voters? They re-elected Frank ten more times.

In 2009, Massachusetts House Speaker Sal DiMasi stepped down and was indicted on corruption charges. It is alleged that he and his friends took pay-offs for sending state business to a private contractor. Following in the footsteps of former speakers Tom Finneran and Charles Flaherty, DiMasi becomes the third consecutive speaker of the Massachusetts House to be indicted. The Massachusetts voters? They just keep electing them, don’t they?

The common thread among the six aforementioned miscreants is that they all belong to the dominant party: they’re all Democrats. Does that mean that Democrats are uncommonly likely to break the law? No, it means that in a one-party state, politicians have little to fear from the electorate.

The Massachusetts voters? Unless that ratio changes, it would appear they will have little choice but to keep electing criminals.

Marxists on Marxists

The Russian newspaper Pravda has its own perspective on the United States that often differs from ours. Recently, they opined in a page one article, “American capitalism gone with a whimper.” What do they mean? Just that, “the American decent into Marxism is happening with breath taking speed,” they explained.

Surely, it is an exaggerated controversial article to gin up readership. But, is there any substance to the claim? This week’s Wall Street Journal points out that in the past nine months, the Federal government has:

• become the nation's biggest mortgage lender
• guaranteed nearly $3 trillion in money-market mutual-fund assets
• commandeered and restructured two car companies
• taken equity stakes in nearly 600 banks
• lent more than $300 billion to blue-chip companies
• supported the life-insurance industry
• become a credit source for buyers of cars, tractors and even weapons for hunting.

 What do you think, tovarich?

Interesting rates

As interest rates begin to creep upward in response to inflationary pressures, the Federal Reserve is not yet concerned. The consensus from the Fed and the President’s financial advisors seems to be that, if inflation begins to rise, they can change policy in time to halt it from becoming a problem. Some believe them and some don’t.

The challenge that the Fed faces is that the price of goods depends on the amount of money available to buy those goods. If the amount of money increases, then prices increase: ergo, inflation. The amount of money is determined not simply by counting the currency in the public’s hands, it also takes velocity into account; velocity is the number of times that an average unit of currency, such as a dollar, is transacted during the course of a year. If a dollar is stuffed into a mattress, its velocity is zero and therefore, the amount of currency in circulation is irrelevant. If, on the other hand, the holder of that dollar spends it for a new mattress and the mattress maker spends it on raw materials, the dollar velocity is two. (Naturally, if the mattress maker spends it quickly and the recipient of that money spends quickly, the velocity of that dollar rises even faster.)

Because of widespread fear of a further slowdown and skepticism of economic recovery, right now the velocity of money is very low, as is inflation — in spite of the fact that the amount of currency pumped into the economy has risen. But, if velocity increases for whatever psychological reasons that consumers and businesses may have, there will be extraordinary inflationary pressure on the dollar.

Some people are betting that velocity will increase at some point and the Fed will not be able to reduce the monetary supply before inflation gets out of control. Hence, interest rates are rising. Others are betting that the Fed and the Administration will be able to handle an increase in velocity with sound policies.

What do you bet on?

BRICs and loans may break our stones

 Meanwhile, BRIC (Brazil, Russia, India and China – another new acronym) met in Russia last week and one of the topics for discussion was that of a new world reserve currency to replace the dollar. There is no move for an immediate change, but if there is a switch to a stronger (read non-inflating currency or reserve method) currency, the value of the U.S. dollars held by BRIC will be reduced and that would pressure U.S. interest rates to increase dramatically — meaning that the U.S. will need to spend more to finance its debt and more money will be held by foreign governments with all the economic and political connotations that that entails.

But, as other world economies look at the U.S., they can take heart from President Obama’s press secretary Robert Gibbs when he said, "There is no safer investment in the world than in the United States." One hopes that Gibbs is right.

Meanwhile, over in China …

Everyone knows that China has been helping to finance our debt to the tune of $1 trillion.

Lest you think that everything is rosy in the red empire, think again. China has their own unique financial problems.

Consumer spending has fallen from 59% to 47%. That hurts revenue and the tax collections that are based on revenue. Many economists believe that tax cuts stimulate economic growth, and increase the tax base. Disregarding that bit of economic advice China is taxing like mad in order to finance their own stimulus spending ($585 billion); in Beijing, taxes amount to 65 percent and to that, add income taxes.

But that’s about half the story; almost half of the stimulus financing is carried out by local districts that have little taxing power. In a socialist market economy, that leaves the state-run businesses to issue bonds to raise the rest of the money. But who will buy those bonds? It seems reasonable for the Chinese government to buy bonds of state-run businesses, but wait a minute — If China does that, then they’ll have less currency available to buy U.S. debt in the future.

Do you think they care about buying U.S. debt? You bet they do. Don’t forget the debt that China holds now and if the U.S. economy begins to falter, then the U.S might start to print more money – devaluing the currency. With China holding $1 trillion of U.S. debt, that would effectively devalue their holdings. So China has to worry about their own precarious financial situation as well as the U.S.’s.

Of course, a contributing factor to the U.S.’s economic downturn is trade imbalance. China sells the U.S. goods and then keeps the money instead of turning it around and buying U.S. goods. Well, they don’t keep the money under a mattress or bury it; they buy American government financial instruments which, in turn, allows the U.S. to buy more Chinese goods. This is good for the American consumer and the Chinese worker but can it go on forever?

Like the U.S., China is hoping that fast growth will pull them through this financial imbroglio.

We, as the curse says, live in interesting times.

Robert J. Kulak

West Hartford, Connecticut