Federal Finances Are Doomed (Sequester or No Sequester)

Founder Bill Bonner

Dow down 216 yesterday... gold firms. More below...

On Sunday, we composed our Diary remarks for Monday. But reading it over, we found ourselves bored by it. If we are bored, we certainly can't expect you to take a lively interest, can we?

In the Lenten spirit of self-denial and meditation, we can't expect you to appreciate what we did not.

So, we went back and tried to figure out what we thought was so damned interesting in the first place.

The problem was not that we lacked a good idea... but that we had too many. Jammed up against each other, the result was uncomfortable -- like a trip on the Paris metro at rush hour.

We tend to read several books at once. Typically, the themes are related... and we enjoy watching the intersection of strong thinking. But sometimes there is a collision, which makes an awful mess.

Currently, we are reading Furies, about the European wars of 1450-1700; Immoderate Greatness, by William Ophuls; and we are rereading Friedrich Hayek's classic, The Fatal Conceit.

Immoderate Greatness is a surprise. A dear reader sent it to us: Mr. Ophuls himself. It is a clever, jaunty look at why civilizations fail.

Hayek's book takes up the same theme, without saying so. He explains the problem of central planning and why it doesn't work for a complex, "extended" civilization. Furies is light reading -- telling the tale of what happens when leaders fight each other for control of territory without much regard for the weal of the people living there.

To Sequester or Not to Sequester

We'll come back to these in a moment and continue on these themes for the next few days. But first, let's turn our eyes to another gaudy show: today's financial hurly-burly.

The Dow fell 216 points yesterday. Why? We don't know. Are investors concerned that the Fed will turn off the money machine?

Are they troubled by the "sequester," which would further squeeze government spending? (This year, Washington is embarking on fiscal tightening of 2% of GDP -- one of the biggest budget squeezes in the last century.)

Every day comes news from Washington. Sequester? Compromise? Meat axe? We are getting tired of it. Here's Reuters:

"They've rolled out this great political theater about how cutting less than 3% of the federal budget is going to cause all these awful consequences," said Louisiana Governor Bobby Jindal, a Republican, on NBC's "Meet the Press."

"Here's his chance to say, 'Here's how we can do it better,'" Jindal said, suggesting Congress and the White House give departments the ability to cut spending on less essential services.

Senate Democrats have put forward a plan that focuses on those tax loopholes. This week, Republicans are expected to propose alternatives.

"We don't have any ability with dumb cuts like this to figure out what the right thing to do is," Education Secretary Arne Duncan said on "Face the Nation."

"There are literally teachers now who are given pink slips, who are given notices that they can't come back this fall," Duncan said.

Democratic Congressman Eliot Engel agreed that Congress should seek "smart" cuts, rather than across-the-board reductions.

"I think Congress should sit down and avoid the sequester," Engel said on ABC's "This Week."

"And if the sequester kicks in, for a week or so, we should then fix it so it doesn't become a permanent thing," Engel said.

Blah. Blah. Blah.

And here comes Alan Blinder in The Wall Street Journal. Stop worrying about debt, he says. It's under control. Sort of.

Blinder says the budget fights in Congress have paid off. The idea from the get-go was to cut $4 trillion from the $10 trillion in additional debt the feds were meant to add over the next 10 years. That was supposed to stabilize federal debt -- the portion in the hands of the public -- at 73% of GDP.

The Budget Control Act of 2011 chipped off a bit: $1.9 billion, if you believe the forecasters. Then there was the "fiscal cliff" settlement, which took off about $850 billion more. Just 0.6% more to go, he says.

Not only that, but also he says Medicare costs are growing slower than GDP... which is a real feat, since GDP contracted in the last quarter.

An Edifice Built on Sand

So, what do we budget-bankruptcy-and-boondoggle worrywarts have to say about this?

We say it ain't so.

  1. Because the budget forecasters presume a return to "growth," which may or may not be so.

  2. Because they predict that interest rates will remain low, which we know can't last forever.

  3. Because they don't bother to consider the real debt -- which takes into account unfunded liabilities, such as pensions -- that is growing seven times faster than the official debt.

  4. Because they completely ignore that the federal budget edifice is erected on the sand of EZ money from the Fed. The central bank is helpfully printing money at almost exactly the same rate that the feds borrow it. When that tide goes out -- and it must, sooner or later -- it will wash out the foundations under federal finances... and the whole thing will fall down.

It's not that Blinder is wrong. It's just that there are other things going on that are likely to make nonsense of his smiley-faced projections.

Of course, only time will tell. And we'll stand down... and let time tell her story at her own speed.

Debacles, Disasters and Catastrophes

Now, back to our books...

History books are full of facts. And facts are nothing without nuances. Out of context, they mean zero.

School children are taught that Columbus discovered America in 1492 or that Nelson was the hero of Trafalgar. But it is meaningless noise. The "knowledge" these facts purport to carry is hollow.

What gives facts meaning? A story. A narrative. A "why" that puts the facts together like links in a chain. One thing happens. Then another thing happens because of the first. That's what history books give you.

But the books tell a tiny part of the story. No facts have a single, giant taproot. Instead, their causes spread out in all directions like the roots of a bamboo. You can build a narrative around any of them. None alone explains the fact... and the collection of them is too vast and complex to be understood by anyone.

History is a long tale of debacles, disasters and catastrophes. That is what makes it fun to study. And useful. Each disaster carries with it useful warning.

For example, if the Sioux have assembled a vast war party out on the plains, don't put on your best uniform and ride out to the Little Big Horn to have a look.

And if the architect of a great ship tells you that "not even God himself could sink this ship," take another boat!

And when you are up against a superior force, like Fabius Maximus against Hannibal, don't engage him in battle. Instead, delay... procrastinate... dodge him, wear him down, until you are in a better position.

And if the stock market is selling at 40 times earnings... and all the experts urge you to "get in," it's time to "get out"!

The Forgotten Nuances

You can learn something by reading history. But not much. Histories are narratives. They are stories. One root is examined, while all the others are ignored.

More is ignored than examined, simply because there is always much more to the story than anyone could ever study or understand.

Focusing on the single root, therefore -- a single narrative, which is what good history requires -- necessarily makes the reader more in demand at dinner parties, for now he is able to talk at length about history. But it also turns him into a fool, since most of what really happened has been shaken out of his history book and left lying on the ground.

The truth, as Ernest Renan remarked, is in the forgotten nuances... not in the logic of the narrative.

But there is truth... and there is Truth. The Truth is unknowable... and certainly not accessible by a little brain struggling to apply Cartesian logic. In fact, the real Truth is often at odds with what you might regard as logical truth.

For example, you might have a noisy, obnoxious neighbor. You might come to believe you would be better off if this neighbor were not among the living. We are all going to die, you might say to yourself. If this person would die a little sooner than otherwise planned, it would be a good thing for the whole community. (Perhaps true.)

Then you might also come up with a fairly good plan for hastening his demise, realizing that everyone would be happy at the news and no one would look too carefully at how he came to fall down the stairs of his own house... only to be discovered days later by a concerned neighbor. Logically, the odds of detection might be near zero. True again.

But wait. Murder someone and you will go to jail... and to Hell. That is the Truth. Whether it is true or not is another matter.

Regards,

Bill Bonner

Bill


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