The FED, IMF, China and the Wold Bank 

Going along with the Comparative Disadvantage theory that I have previously posted here we also have currency manipulation going on to help support that deceit.  The main player, and the one with the most to gain, in this game, is China; however they would not be able to play this game if it weren’t for the social welfare policies that America and Europe have been following since the end of WW II.  As the war was coming to an end the Allies held a conference in Benton Woods New Hampshire to establish the monetary system that would be used in the world after the war had ended.  By this time, July 1944, the Allies knew the end was near for the Axis powers and that there would need to be a way to manage the rebuilding.

The United States as the driving economic and military force for the allies and as the one country that was still intact was the only one capable of supplying the currency for rebuilding. The currency would be the U.S. dollar backed by gold. The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate by tying its currency to the U.S. dollar and the ability of the International Monetary Fund (IMF) to bridge temporary imbalances of payments between the members.

From then on the dollar was therefore the Reserve Currency of world commerce and virtually all goods traded internationally were priced in dollars.  Then on August 15, 1971 President Nixon took the United States off the gold standard because of complications between the gold standard and the United States being the reserve currency and at that point the Dollar’s value was solely a determinant of the United States government.

Although that system worked reasonably well for a while there was a hole in the system that was used first by the Japanese and then more currently the Chinese.  For various technical reasons there was a way to manipulate the exchange rate between currencies to give a country a trade advantage with the United States.  Japan being a small country was only able to use this method for a short time and it was mostly played out by the late ‘80s.  However that manipulation was what allowed several Japanese companies to become the dominant players’ in a number of the world’s consumer markets.

The Chinese after Mao was gone and the U.S.S.R. (Russia) fell realized that since central planning didn’t work they were going to have to do something or the U.S.S.R.’s fait would soon be theirs.  I think they saw how the Japanese conducted their trade with the United States and they set up a similar system to be used by them.  This system, in time, allowed them to run up a huge trade deficient with the United States as described in the previous section.  Also in that section we saw how our politicians allowed that to get out of hand creating the situation we are now in.

The United States was not alone in the imbalances of government spending Europe was also a player only in a different manner.  Europe banded together forming the European Union (EU) in November 1993 probably has a result of the breakup of the USSR in December 1991 thereby eliminating them as a security military threat.  The Europeans thought that by forming this Union they could become an economic power house.  However that was not to be as they twenty years later.

Between 1995 and January 1999 the majority of the countries in the EU adopted the Euro as their official currency.  Why this was done I don’t know since every economist knows that you can’t have one currency and multiple fiscal policies being conducted by the member states.  Could the 50 American states each have their own state national bank that could set internal, to the United States, policies — well the answer is no the Dollar could not stand that for long and the Euro didn’t either.

Some countries like Greece went on a spending binge but they were not alone Spain, Portugal, Ireland to name just a few all conducted themselves recklessly and ended up forcing their internal banks to buy sovereign debt from them as well as other member states.  The monies generated were given to the various citizens groups such as the Unions and various social welfare benefits programs.  By the mid 00’s many of these former impendent countries had run up sovereign debt well in excess of their Gross National Product (GDP).

After the financial collapse in the fall of 2008 and the weak recovery in the next few years the problem with the EU debt became worse mainly, but not limited to, Greece as they got closer and closer to default.  Various austerity programs were tried but as of this writing no real solution has yet been found. Worse the Greek citizens’ not liking the austerity have begun to strike and riot in protest.  The EU is trying desperately to solve the Greek problem but since the Greeks are only the worst of the lot the EU governors may not be able to succeed.  The past reckless spending on social programs is exacting to great a cost.

Foolishly we elected many naive politicians in United States over the past 20 years and they embarked on a program to transform the American system into the European system, because we were told that our system was broken.  However the fact is that the European system is not working as advertised; or they would not be having all the problems that they have. This is of no consequence to these intellectuals’ politicians and they are going full steam ahead with their program for internal changes here.  The result of these new programs has been massive deficit spending averaging about $1.6 trillion per year for the last 40 months and by the end of the government FY, September 20, 2012, total federal deficit for the full 4 years will probably top $6.4 trillion.  We are averaging about $133.3 billion per month of deficit.

So we have both the Europeans and the Americans spending on give away programs like there is no tomorrow, and there probably isn’t, and the Chinese not liking this situation have embarked on a plan to take over the world financial system as a result.  This brings us to the description of what is going on now — under the table so to speak and this is the reason that the financial markets have been so erratic of late. Even though many in the financial markets do not see the big picture they do sense the undercurrent of instability and that causes the markets to move first one way and then another as rumors and facts point first one way and then another.

The result of what was just described is that there are three currency wars being waged as you read this. The European Union (EU) is fighting to prevent Greece from bringing down the EU (the latest deal is not enough). The second battle is being waged by the Federal Reserve (FED) in America to prevent a second recession.  The third is the war the Chinese are waging against both the EU and America over western devalued currencies. The signs can be seen in the movements in the commodities, stock, and the gold markets e.g. gold moving in the same direction as the Dow Jones Industrials (DJI) when they normally move opposite of each other.

The players in the game are the FED, the International Monetary Fund (IMF), the Bank of England (BOE), the European Central Bank (ECB), the Peoples Bank of China (PBC) and The Chinese State Administration of Foreign Exchange (SAFE).  Of course the political leaders in these countries are the puppet masters for these agencies. This list can be put into two groups the Western Countries, the WC, (America, England and the EU) and China.  The WC with their excessive entitlements spending and resulting debt needs to inflate their currencies to prevent collapse. China holds much of the WC debt and doesn’t want that. They seem to be in the driver’s seat but the vehicle is speeding down the road and the bridge just around the bend is out.

The Chinese think that they have found a way out of their dilemma; by manipulating their currency using the PBC and SAFE as their tools to achieve their goals. It works like this, when a Chinese company receives payment from the U.S. for goods supplied to a company there the dollar denominated payment goes first to the PBC and then from their it’s turned over to SAFE so SAFE ends up with the dollars. But the PBC gives the company that sold the material payment in Yuan in lieu of the dollars that were sent to them. However the Chinese not wanting to lose control make this a conversion at a fixed exchange rate set by the PBC.  The Chinese company gets paid and yet the Chinese government still has the dollars so in effect every dollar payment coming into China is doubled there; the company gets paid and the government holds the real money which it invests in the world outside China.

The wild card in this plan is that China does not allow many foreign made goods into their country because they need to create lots of jobs.  At least they have the creating jobs part right. So they buy things like gold mines, and other minerals and energy related mines and resources and — sovereign debt.  This is an economic system from the past but well discuss that later.

It’s now estimated that SAFE holds $3.2 trillion in foreign currency (almost half of that in U.S. Treasuries) and as previously stated China is worried about the WC countries resorting to inflation; as in the FED QE programs and the ECU write down of Greek debt. So they have gone, under the table, on a gold buying spree.  China probably has 2,000 tons of Gold now and is expected to take that to 5,000 tons in the next few years. Their plan is to make the Yuan a gold backed reserve currency. Unfortunately for both them and us the Chinese leadership being Marxist don’t understand the free markets and their real knowledge of world finance is limited and so this plan of theirs will backfire on them.

This currency battle can’t be hidden much longer. The trigger that brings this problem into the light could be a Greek full or partial default, a 2nd U.S. slowdown or recession, or the recent FED announcement that they plan to inflate the dollar by 33% over the next 20 years (2% a year).  Or it could be something else; the reason doesn’t really matter what matters are what actions, on the world stage, will be taken. If we aren’t prepared and make the right choices the results will likely be counter productive and those results will be very, very bad.

The problem we now have is that if the U.S. dollar fails the Chinese Yuan can’t replace it for two fundamental reasons. The first reason is that in any monetary system based on gold, A Gold Standard, the gold “must” be free to move between countries. The second reason is that in economics there is something called the Triffin dilemma which states that the country with the reserve currency, the U.S. right now, has to be a net importer of goods and services. By importing goods we supply dollars into the world market and this is how the world economy works. In essence we are exporting dollars and importing goods.

China will not let gold out of the country
China is a major exporter of goods

Therefore the Yuan can’t replace the dollar and the system that China is putting in is the very system that was in place in the eighteenth century prior to Adam Smiths Wealth of Nations being written — it was called the mercantile system.  This system tries to make all transaction favorable to one country and to horde gold at all costs.  Spain in its quest for gold created sever internal inflation that eventually destroyed their empire.  Smith proved conclusively with inductive logic that the mercantile system hurt trade and everyone was worse off and that it was one of the reasons that there were so many wars.

The pedal is to the medal, the bridge is out and it’s almost in sight.

Friedman’s Spending Matrix

The very famous Nobel Laurite economist Milton Friedman explains a key aspect of social behavior in his 1980 book Free to Choose (Friedman’s wife, Rose, is a coauthor).  Friedman’s book should be mandatory reading in all our high schools and is a very highly recommend read for anyone with an interest in politics and economics.  Friedman’s writing style make this book an easy read. In Chapter 4 on page 116 of Free to Choose, Friedman presents a matrix which sums up the economic decision-making process, and this is critical to the understanding of the behavior of people with regards to how they spend and who they spend on.  The following is my interpretation of Milton’s economic matrix:

Friedman’s Spending Matrix

This simple matrix is really quite easy to understand.  The two columns labeled “A” and “B” and the two rows labeled “1” and “2” result in four possible situations:  A1, A2, B1, and B2.  These four possibilities are described in the next few paragraphs.

A1 In this situation, someone earns money, assigns a value to that effort, and then spends the money on something for him/herself.   The personally “assigned value” is used to make decisions about how the money earned will be spent.  The amount earned will determine one’s priorities and motivation for distribution of it e.g. the spending.  Maslow’s “hierarchy of needs” directly applies to these decisions — If one earns only a small amount, the money will be spent on the necessities of life; if one earns more, one can indulge in some “frivolous” spending. The bottom line is, however, that the person who earned the money will spend it to maximize his/her personal satisfaction (consciously or unconsciously in the best way he/she knows.  Only the person who actually performed the work to earn the money can place a “true” value on it that is proportional to the effort that went into earning it.  Further the “value” will be different for every person. This situation is the only one that optimizes the individual’s spending. The optimization of the individual’s transactions when summarized in the market place maximizes the economic transactions of the society. The maximization of monetary transaction in an economy must be steered into this category if the economy is expected to be viable.

B1 In this situation, someone uses the money that they have earned to buy something for someone else.  A good example of this kind of spending is the simple birthday present.  What you buy for the other person, however, may not be what he/she would have bought had they spent that amount of money on himself/herself.  In many, if not most all, situations, an individual simply cannot spend money for another individual to the highest satisfaction of that recipient.   Even husbands and wives or parents and children do not achieve total success in this arena (imagine how much worse people of less familiarity must fare!).  This situation does not optimize the individual’s spending. However, the spender does allocate their money used in accordance with the value they placed on it. We all known how many times a person return gifts to a store after getting them, so time and money was spent by the giver to get the gift and time and money was spend by the receiver retuning it. So by definition this process can not be as efficient as that of A1. The best method for giving gifts would be to give cash or a gift card.

A2   In this situation, someone else uses the money he/she has earned to buy something for you.   This, of course, is simply the reverse of B1.  We have probably all experienced receiving a gift that we did not use or like, no matter how much we may have appreciated the effort made by the giver. The old expression “it’s the thought that counts” probably comes from this very situation.  This situation, like B1, tends to be economically inefficient, and does not optimize the individual’s spending.  (By all this Friedman does not mean to imply, however, that one should stop giving gifts there are other factors besides economics to consider!) Since B1 and A2 are just the flip side of each other they could be combined.

B2   In this situation, someone else uses the money you have earned to buy something for someone else.  This is the problem situation, because there is absolutely no motivation to optimize spending.   This scenario is epitomized by government actions and spending no matter what the form of the government:  The government taxes you (you have no choice but to pay), and subsequently uses that money to buy something, or provide a service for, somebody else.  This process can never be accomplished efficiently, since neither the spender (the government bureaucrat) nor the recipient care about the “value” of the money spent.  It should be understood that it is the very process itself, and not the individual government employees, that causes the problem. There is no way to make government (of any kind) an efficient method of providing goods and services since the “value” link is completely broken. This is why Social Welfare, Communism and Redistribution of Wealth do not and cannot work in practice, no matter how hard one tries to make any of these policies work. But there is more as a layer of bureaucrats are required to handle the taxes and the distribution of the money; this process provides no economic benefit and so as these programs go the economy become less and less efficient. .

One of the objects of Friedman’s work was to show why the welfare start could not work for long in any society.   Both Marx and Keynes tried to justify large transfers to those at the bottom from those at the top.  Forgetting the wanting to do good issue by now after trying to do this so many times and always having it work out badly one would think that we would realize that Friedman was right.  His B2 situation shows the fundamental issue with the process that makes it impossible to work.  And Adam Smith in his book the Wealth of Nations comes to the same conclusions from a different perspective. Government by its very nature and purpose is not suited for legislating social believer and for sure never every actually running anything.

By contrast, private industry must provide services or goods on which individuals are willing to place personal value and spend money on.  Private industry must entice the buyer with “Value” to make the sale (positive feedback).  Firms or organizations that don’t provide real “Value” do not last long, for when their sales slow down they must immediately find and correct the problems (negative feedback) or they will either lose market share or go out of business.  This is true for both large and small companies there are no exceptions.

For example, Sears which was the premier consumer retailer for decades stopped providing “Value” to its customers and was dethroned by Wal-Mart who found a more efficient way to supply goods to the consumer.   The too big to fail belief of this current administration is not valid.  Bailing out companies of any kind or size only make the situation worse for it mitigates the consequences of making bad decisions.

The Friedman matrix thus proves that it is virtually impossible for any government no matter how formed to efficiently manage an economy.  Moreover, this logic is borne out by history, which has witnessed the absolute failure of all attempts at central planning or collectivism.   The collapse of the U.S.S.R. (Russia) in the late 80’s and early 90’s was a result of the inability of the Russian “Central Planners” to make good economic decisions and their economy collapsed as a black market developed that was by some accounts becoming the real economy of Russia. We should keep this in mind as the progressive politicians are right now duplicating the very system that brought the Russians down.  What these Politian’s’ don’t understand is that there is no way to make Central Planning work unless you have an absolute static economy with no innovation and growth, a hydraulic society as existed thousands of years ago especially in China and India. These were systems with strong Central Planning and static or unchanging social systems i.e. things were the same today as they were 10 years ago or 100 years ago or a 1000 years ago.

Only market-based systems can efficiently allocate resources.

Although it may be argued that social goals must sometimes take precedence over economic efficiency, Friedman disagrees with this statement explaining in his book that there are other ways to achieve social goals. Friedman did suggest that if the government had to do something that the best system would be a negative income tax that only gradually disappeared as income rose so there would be no disincentive to work and earn more, which is the core problem with most all social welfare programs as exist today.

The Free Market Works best, when it is “Free”

There has been much debate some very heated over many complex issues today energy policy and climate change being only two of them and so the methodology we use to resolve issues like these becomes a very important subject.  The core of the issue is; should the government set development policy or the private sector? But before we can even discuses methodology and who sets policy we need to review some history, in particular the period from 1929 through 1949. More or less before 1929 most development in this country was in the private sector.  After 1949 more and more development ended up being directed and financed from the public sector e.g. the federal government.  I do not mean to imply that these are hard dates but that there was a gradual soft turning from one way of doing things to another way of doing things.

Much of what happened in this period centers on economics which in non-economic terms was a battle between the Free Market (laissez faire) as developed by Adam Smith and Central Planning as developed by John Maynard Keynes views of governance. During the ‘30s Europe was experimenting with Central Planning and America, the home of the Free Market, could not get out of a very serious recession. So naturally central planning was being seriously considered as the solution to the deepening problem. Again keeping this technical subject short and simple it was the actions of the federal government playing with Central Planning through the newly created Federal Reserve (Fed) that turned the 1929 market crash, a normal market correction, into what became known as the Great Depression.

However, the true reason for this economic depression here wasn’t actually known until 1964 that Milton Friedman a noble laurite economist showed what really happened.  The bottom line was that the Fed’s inept policies collapsed the banking system. This is fact not speculation. Unfortunately forty years had passed and by then the fixes that were tried were ingrained in the people and the politicians.  The fix being that a strong federal government could spend borrowed or printed money to stimulate economic growth.  In reality it was WW II that ended the Great Depression as spending changed from social policy spending to making armaments.  But I digress so continuing the politicians loved this concept of “spending” as it gave them a way to buy the votes of the citizens — and the modern welfare state was created.  Obviously this was not all at once, it took decades, but once in place it became impossible to get out.

We know today that the economic logic used to justify large governments and deficit spending is false but that economic proof is beyond the scope of this paper.  For those that are interested read The Big Three in Economics by Mark Skousen. However, we don’t really need academic proof we can see that the 2009 stimulus legislation that authorized almost a Trillion dollars of spending to prevent a bad recession, all borrowed by the way, did not do what it was indented to do.  If the theory had been valid at any level there would have been a large jump in the countries Gross Domestic Product (GDP) and many hundreds of thousands of jobs created.  Instead we got almost no jobs and very little growth.  We were told that things would have been even worse if that money hadn’t done what it was supposed to do.  Try claiming anything like that in the private sector and see what happens. This along with the exact same inability to spend our way out of the great depression was definitive proof that the basic theory was flawed.

Now back to development and the source of funding. Partly because of the success of developing the atomic bomb in WW II in so short a period of time and partly as the growing but mistaken belief that large government was good, development money started to flow from the government to the private sector.  Nuclear power then space then computers (initially) were successful but when the spending began shifting from technology based to social policy spending like the “great society” and “war on poverty” we had a problem.  But we need some more history to understand what happened.

In any serious study of government one quickly finds that there was great fear of large powerful governments.  And for good reasons, the first reason is that over the last several hundred years all the major wars were started by countries with a strong central government. Then next look at history and all the economic chaos caused by government interference in the economy. Of course what government would ever admit they were wrong so that is mostly blamed on the private sector. History is full of debate and discussion on this issue and over time it became accepted thought that as Thomas Jefferson said “A government big enough to give you every thing that you need, is big enough to take away everything that you have …” and that is truer today then ever.  Think of all the recent scandals: Fast and Furious, Benghazi (Four dead in Libya), the IRS, the NSA, and now Health Care Insurance.   Besides the politicians lust for power a good part of the reason for this is that there is an inherent flaw in government spending.  The flaw is systemic one that can not be eliminated as many of the political theorists understood when our country was founded.

The flaw is that all government decisions are based on politics.  That means that almost all legislation is designed to either to buy votes e.g. Social Security, or to reward someone for political favors e.g. Solynda. There are almost no exceptions to this.  The main purpose of the U.S. Constitution was to make it “hard” for the federal government to actually do something or anything. The principle of separation of power was how that was done. Further there was a limit on their spending as there was no income tax. That was changed by the 16^th amendment in 1913 that established the income tax system we now have. And that same year the Federal Reserve Bank was created and that eventually gave the government the ability to create serious amounts of fiat money. Again don’t believe me read Free To Chose written by Milton and Rose Friedman.

So combining the two big government and unlimited spending we have money taken, borrowed or taxed, from the private sector that is spent on government programs that are based on legislation made for political reasons. This is contrast to the private sector which only spends money that is justified by a documented future return on that investment.  Granted that the private sector is not perfect but we do find that it is self correcting in that bad decisions do put businesses out of business. Profit is the reward for doing good and the lack of profit means that no one wants your product or service and you go away.

The government on the other hand when it wants to spend on something can: borrow more, taxes more or worse just print more which is basically just putting a tax on everything.  Then if it doesn’t work, and it almost never does, they just ask for more money.   The Department of Energy (DOE) was created to make us energy independent and we are much worse off today then when it was founded.  The Department of Education, now Health Education and Welfare, was created to improve education and even after changing the scoring system education is worse now then it ever was.  Only two examples there are many more. And yet after decades of no good results and billions spent they both claim they need more money to their job.

The most egregious current policy related to development is that based on the elimination of CO2 emissions.  The reason is that a critical requirement for plants to grow, CO2 has now been determined to be pollutant. This policy is of course the government program to buy the votes of the farmers be they private or corporate by subsidizing corn production to make into ethanol to make E85 gasoline. This program makes no sense at any technical or economic level and was never anything more then a way to buy votes from environmentalist and farmers.  It is not energy efficient since it takes more energy to make then it produces.  And by diverting good crop land to growing corn for E85 instead of food it raises the price of food not just in this country but world wide as less corn is available for export and what is grown is more expensive. No one today with knowledge on the subject will agree that this is a good idea.  But once started it, like any government program, cannot be stopped.

Another current government induced policy with very questionable benefits is the forced switch from cheap incandescent lamps to expensive compact florescent lamps (CFL’s). The logic is that the 10% efficient incandescent lamps will be replaced by 50% efficient CFL lamps and that will save a lot of electricity.  Less electricity means less pollution, CO2 and mercury. Although technically true there are major offsets that have been minimized by studies that are not completely valid.  The first reason is that all the energy from the lamps ends up in the building where it is installed mostly at night for obvious reasons.  It’s also colder at night and so the heat of the lamp is an offset against the heating load of the building.  The less lamp heat there is the more gas or electricity that must be used to maintain the set temperature.  This effect can completely offset the gain in cold climates.  There probably is some reduction over all but not what is claimed.

The other more serious issue is with the mercury in the CFL’s.  The EPA claims that the landfill emissions from CFL lamps is lees then that emitted from power plants making the electricity and therefore it’s a gain for the environment.  Whether that claim is true or not the real issue is broken lamps in the home where most of these CFL’s are going.  This more serious issue is not even considered in the EPA figures.  Whether this is a real problem or not I don’t know but considering this omission why would you believe a study that was not done by an independent lab.  If the government is promoting something they would be the last people that I would believe, just as I would be skeptical of the claim of a company promoting a product, at least until verified buy independent review e.g. Consumer reports.

One thing that is not understood with all government studies is the logic that they “have” to use to do these studies.  All government work is funded by legislation, law so to speak, and that legislation dictates that money be spent in certain ways, line item by line item. This method of funding and running departments includes the way that studies are done, which in some if not all cases dictates the methods to be used since the methods determine the costs. The bottom line to any government study is that although the report maybe 100% true in may also be meaningless if it did not consider all relevant items.  Before any government report can be used one must look at the law it refers to and what were the dictates governing the conduct of that study.  If you had only worked in the private sector you would not understand this process and how it can distort outcomes.

For example if you are in the U.S. military you do not exist for purposes of having a job even with the now professional military.  It was determined that the military did not keep track of their jobs the same way that civilians do and that since there was so few of them that they would just be ignored.  They were not worth tracking.  Is this a big deal maybe, maybe not, the point is that if you really wanted to know how many people were drawing a paycheck in the United States the government reports would not give you that number.  So we have a report that is correct to the accuracy available but yet doesn’t give us what we want to know.  All government work falls into this kind of quandary.

Some would say that our representatives are the only ones looking out for us, protecting us from greedy businessmen and Wall Street capitalists.  To those people I would say they are very, very wrong.  The politicians claim the private sector is the problem and therefore they need to be regulated; for example as in the Security and Exchange Commission (SEC) that makes it a federal crime to trade on insider information. However when that legislation was written they, congress, exempted themselves from being covered. So they can and do make trades after being briefed by say the Fed in closed door meeting.  They make money on insider information that anyone else would go to jail for.  And in fact there are people and firms that watch what stocks or land or other things that our representatives buy or short and do the same since these watchers know that those representatives have inside information.  Another maneuver to make money that our representatives’ use is to buy land directly or indirectly near an interstate highway and then appropriate federal money for an interchange to be placed there thereby raising the value of the property they bought.

Not understanding the systemic flaws of governmental actions we have created a host of government departments and agencies that do nothing much but distort the free market.  There is no business in this country big or small that does not have to deal with local state and federal laws and regulations.  Whether these laws and regulations were done for good reasons or not the bottom line is that they put government in the companies as a partner that must be consulted at every step of running a business. These reports, costs, fees and taxes raise the price of the product and or services that companies provide and that is the primary reason that so many jobs have left this country.  CFL’s for example are all made outside the country as are all the “I” phones and “I” pads.

As government got bigger and bigger after WW II and the funded research in computers space and other technologies, money started to flow into the universities for research.  Initially maybe that was OK but soon direct government funding for research reached 30% of all research and of the remaining 70% of private money a good portion was directed at supplying product to the government. Today all the major private research labs are now gone with the exception of pharmaceuticals. With government now in practical control of the research funding they could funnel the money into areas that they wanted benefit or to reward supporters.  Pick winners and losers based on political decisions. Since the primary goal of politicians is, number one get reelected and two make money one can see that money was taken from the private sector passed through the government and then dispensed to companies and universities with political connections.  The recent book “Extortion” written by Peter Schweizer explains the process the politicians use in details that you really don’t want to know.

My opinion is that over 50% of that “grant” or “study” money is a pay back for political support (direct or indirect) and therefore the result of the work product was of little practical use to anyone.  All federal departments and agencies partake in this process since they are all run by political appointees. You would be shocked to see how much funding goes to grants from say the DOE to study non energy issues or to groups that have political agendas that match those in power.  Tens of thousands of non profits have been created to suck up of this free money.  This distortion also makes it hard to determine how much is being spent on the real reason for that agency or department to exist.  And by doing this the politicians create massive duplication whose only purpose is to create federal jobs.

Many would argue over these statements claiming that these issues are not all that bad and there is more good accomplished than bad.  This view is not supported by any facts.  We know from history that any government that tried to work from a central planning basis was soon gone.  The distortions that government policies create in the market place by improper allocation of costs soon cause these governments to collapse.  The old U.S.S.R. is a prime example; it lasted less then 70 years.  The leaders in China not being stupid saw what happened to Russia and rather then lose their power they opened up a limited free market and that saved their positions, at least for now.  This change is only a couple of dozen years in the making and economic policies can take generations to work out so the jury is still out on this one.

But we can look closer to home and see what it going on in Europe and the European Union (EU) today with their sovereign debt problem.  Their problem is very simple the politicians promised their citizens that they could work less and get more (from the government), someone else would pay the bill.  They got away with this for many years only because the United States covered their costs of protection by stationing our military there.  But even without significant military costs they still couldn’t spend enough so they borrowed money, by in essence forcing their banks to buy their bonds, their sovereign debt. Now they are paying the price the debt service is getting out of control and it’s very likely that the EU will break up in 2012.  The point to this discussion is that big government is bad and that any big government will collapse the country that it is in within 40 to 60 years of becoming the dominant player in that economy.

The federal government of the United States now represents over 25% of the economy and once the take over of the health care sector is completed with “single Payer” it will be approaching 50% but worse if we also look at state and local spending we will be way over 50% and probably closer to 60% within five or six years, assuming the health care legislation is not reversed. Since right now the federal government is borrowing almost 25% of what it spends and that there is no way to close that gap with taxes there is a very, very big problem about to hit us.

Sometime in early 2012, the ratio of U.S. sovereign debt to gross domestic product (GDP) exceeded 100% and now in early 2014 it’s grown to over 110% of GDP.  Worse yet is that the ratio is increasing at an alarming rate such that possibly within five years the United States will be where Greece was when their debt exceeded their ability finance.  That is what triggered the European problem that they have not yet been able to solve; and it now seems likely that Greece will pull out of the EU rather then fix their problem. What happens after that is not good and that is why there is so much current effort (including the Fed loaning the EU dollars) to not let that happen.  Unfortunately, there is no way to fix the problem unless the Greek people would give up much of what they were promised by their government.  So far they seem unwilling to discuss that.

The Greeks are maybe the worse offenders but they are not alone.  Spain, Italy and France to name a few are not immune.  The recent S&P downgrading of many EU banks as well as the downgrading of the U.S. treasuries last year were predictors of what is coming down the pike. This sovereign debt bubble is a lot worse then the housing bubble was and it is all caused by the various government of each of these countries doing something that doesn’t and didn’t make financial sense.

Once the government gets to between 25% and 50% of the economy what’s left of the private sector focuses almost completely on getting government work not what the private individuals want — the government becomes their biggest and in some cases their only customer. It is obvious what that means as the politicians control policy and by doing so they pick winners and losers based on politics.  This is called crony capitalism verse free market capitalism and is what most of the rest of the world has.  There is a semi-independent private sector that exists mostly at the whim of the central government. Costs and prices are distorted by policy and things grind to a halt.

We are not there yet but we are not far from getting there.  However don’t get me wrong I am not for pure laissez faire as that could be just as bad as crony capitalism.  There must be a balance and its up to the citizens to determine that. If nothing else the one thing that should be kept in mind when making that choice is; that it is always bad to concentrate power.  And that those with power will always try to do just that. There is no justification for that and it has always and will always turn out very bad.

In summary although some of what the various government agencies publish is valid it should not be taken that everything they publish is gospel.  There are many factors that go into anything the government does; crony politics, blaming the private sector for everything that is wrong and never taking any responsibility for anything they have done are three to keep in mind. If you treat the government just like any other source of information and know there will be a bias then you will be much better off.