Thomas Jefferson on 'Ineptocracy'

Ineptocracy (in-ep-toc-ra-cy) - a system of government where the least capable to lead are elected by the least capable of producing, and where the members of society least likely to sustain themselves or succeed, are rewarded with goods and services paid for by the confiscated wealth of a diminishing number of producers.  Anonymous via the Internet

When President John F. Kennedy welcomed forty-nine Nobel Prize winners to the White House in 1962 he said, “I think this is the most extraordinary collection of talent and of human knowledge that has ever been gathered together at the White House - with the possible exception of when Thomas Jefferson dined alone.” 

“The democracy will cease to exist when you take away from those who are willing to work and give to those who would not.”  Thomas Jefferson 

“It is incumbent on every generation to pay its own debts as it goes.  A principle which if acted on would save one-half the wars of the world.”  Thomas Jefferson 

“I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.”  Thomas Jefferson 

“My reading of history convinces me that most bad government results from too much government.”     Thomas Jefferson 

“To compel a man to subsidize with his taxes the propagation of ideas which he disbelieves and abhors is sinful and tyrannical.”  Thomas Jefferson

“I believe that banking institutions are more dangerous to our liberties than standing armies.  If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property - until their children wake-up homeless on the continent their fathers conquered.”  Thomas Jefferson 

“When we get piled upon one another in large cities, as in Europe, we shall become as corrupt as Europe.” Thomas Jefferson 

How could we, the stewards of a government so carefully crafted by Mr. Jefferson and his founding brothers, have wandered so far from the principles they carefully laid out to guide us in only 10 generations? The answer is not really a long and complicated one, it can pretty much be summed up by Mr. John Corzine and MF Global, in a word “corruption.” And the fault is yours and mine.  

Corruption is not new to the 21^st century, but we have allowed it to escalate to unprecedented levels in far too many American institutions including business, education, labor, and most importantly, Washington. Thomas Jefferson, John Adams and the Founding Fathers under the tyranny of King George, knew very well that power corrupts and they designed our government accordingly, allowing the people to replace it frequently. What they didn’t envision was professional politics made possible by an apathetic and uneducated electorate.  

The problem with the modern version of Mr. Jefferson’s government is that professional politicians like _________, _________, and __________ are very good at getting elected and, for the same reason, very poor at leading and governing. Their corrupt short-term self and party interests blind them to the more substantive and far reaching issues facing our nation and future generations. Very few of them understand how the engine of this country works. They seem content to drive it into the ground without regard for its basic maintenance, much less, respect. 

Congress is bogged down pointing fingers with pipelines and taxes, while the debts we ‘pass on to future generations’ mounts by the billions. Our President steers us toward Socialism, despite the lessons history teaches of its many failings and despite the glaring example of Europe.  

A country is made strong by is its people and economy they create. The most effective leaders understand that they are in position to serve the people by organizing and challenging them to achieve common goals and to thrive. Mr. President and Congress, “stop wasting the labors of the people under the pretense of taking care of [us].” Lead as one serves.

A Silver Lining?

It’s been a busy week in the world of finance. As you have no doubt heard, no thanks is due to the Congressional ‘super-committee’ in their failure to agree on cuts to the nation’s swelling deficit. Fitch, the last of the big three credit-rating agencies lowered the US credit outlook to negative making the probability of a downgrade from AAA greater than 50%. Retailers and investors popped Champaign corks on the news of Black Friday’s $11.4 billion record sales. US unemployment fell to 8.6% on the strength of 278,000 new hires and 315,000 Americans leaving the workforce. Manufacturing, housing, and construction data show improvement while American and European political leaders do not.

The dysfunction that pervades Congress was this week formally recognized by Fitch when the credit rating agency finally recognized that “declining confidence that timely fiscal measures necessary to place US public finances on a sustainable path will be forthcoming.” Fitch has not lowered its AAA rating on US debt, but placing them on negative credit watch suggests better than a 50% chance it will happen in the coming two years. In its own comments earlier, S&P which has already lowered its rating on US debt from AAA to AA+ said that a further downgrade was not necessary at this time because the committee’s inaction will trigger $1.2 trillion in automatic spending cuts. President Obama has promised to veto any bills from Congress that would undo the automatic cuts.

In response to the missed opportunity by the super-committee, David Riley, Fitch’s head of sovereign ratings in London, said yesterday in a telephone interview with the WSJ “the scale of any subsequent budget cuts are probably going to have to be larger than they otherwise would have been and certainly implemented in faster manner.” U.S. federal debt held by the public will exceed 90% of gross domestic product by the end of the decade, while interest on the debt will require more than 20% of tax revenue, Fitch said. Gross debt, including local and state governments, will climb to 110% of GDP during that span, a level that “would no longer be consistent with the U.S. retaining its ‘AAA’ status,” the firm said.

On Monday, Equity investors were able to turn their attention away from US and European debt crises toward the more pleasant Black Friday and Thanksgiving weekend sales records. US shoppers spent a record $52.4 billion during Thanksgiving weekend in stores and online, representing a 16% increase over last year. Consumer confidence also surged this month with improvement centered in employment. The Conference Board's confidence measure jumped more than 15 points to 56.0 from 40.9 in October. Econoday says the November reading is the best reading since the debt-ceiling debacle and cut of the US credit rating in August.

In that consumer represent 70% of the US economy, that’s great news. But hold on a minute. Bloomberg’s Caroline Baum points out the emptiness in the hope that the consumer alone will revive our economy. She says “the wealth of nations comes not from what we spend but from what we sow: what we set aside to be invested in productive capacity.” If we don’t invest in tomorrow, there will be no money to spend tomorrow. Merriam-Webster defines consumption as “the utilization of economic goods in the satisfaction of wants ... resulting chiefly in their destruction, deterioration, or transformation.” “’Destruction’ should be a tip-off that whatever it is, it isn’t wealth.” This writer thoroughly agrees.

Baum includes the Federal Reserve as complicit in the problem. By holding its benchmark interest rate so close to zero and pledging to keep it there at least through mid-2013, consumers are not getting paid to save. In fact, when inflation is factored in, they are getting a negative rate. So they spend. High real rates (interest less inflation) induce consumers to forgo current spending and save. She says that “households have been deleveraging for three years in an attempt to repair their balance sheets. Yet many economists and policy makers advocate more borrowing and spending as a cure for what ails the economy, and cheer as mall rats infest stores in the middle of the night.” She adds that “it should be obvious that the US suffers from an extreme case of short-term thinking, and it underpins decisions on everything from tax-and-spend policy to monetary policy.”

A lot of economic data was released this week and the vast majority of it was indicative of recovery, albeit modest. The number that will get the most press and make the Administration the happiest is that headline unemployment declined from 95 to 8.6%. Unfortunately, it does not indicate a robust job creating economy. Non-farm payrolls increased by 120,000 in November, 80,000 in October, 158,000 in September and 104,000 in August. The results are anemic by historical recovery standards and much of the improvement in unemployment is due to a smaller denominator; 315,000 people left the job market discouraged.

Manufacturing in the US continues relatively strong and shows signs of improving. The Chicago Purchasing Managers’ Index jumped to 62.6, far above 50 which indicates monthly growth and well above October's 58.4. The ISM Manufacturing index also shows orders trending higher. The new orders index was up a very strong 4.3 points to 56.7 indicating strong growth in November. This index was stuck at levels slightly below 50 for several months.

The Fed’s Beige Book released this week largely confirmed the view of most economists that the economy is improving, but gradually. The report said “Overall economic activity increased at a slow to moderate pace since the previous report across all Federal Reserve Districts except St. Louis, which reported a decline in economic activity. District reports indicated that consumer spending rose modestly during the reporting period. Motor vehicle sales increased in a number of Districts, and tourism showed signs of strength. Business service activity was flat to higher since the previous report. Manufacturing activity expanded at a steady pace across most of the country. Overall bank lending increased slightly since the previous report, and home refinancing grew at a more rapid pace.”

There was some welcome improvement in the housing sector this week as well. New home sales rose a solid 1.3% in October. Price pressures continue but are less severe than prior months, according to Econoday. The median price slipped 0.5% in the month to $212,300 but the year-on-year rate turned positive, at plus 4.0% vs. a revised minus 6.5% in the prior month. Supply on the market fell slightly to 6.3 months at the current sales rate vs. September's revised 6.4 months. The pending home index, which is a measure of contract signings for sales of existing homes, jumped 10.4% in October to 93.3. The gain points to strength in final sales of existing homes for November and December though cancellations, tied to low appraisals that keep buyers from selling their own homes and to restrictions to credit access, have been cutting into the proportion of contracts that make it to closing, says Econoday.

In Europe, political leaders, the ECB and the region’s largest banks are busy putting forth proposals aimed at saving the euro. Tony Blair said in an interview with the Wall Street Journal that the single currency project was politically driven from the beginning, but it is an economic program, and the economics of the project must catch up and meet the politics for it to survive.  A break-up of the euro in any form would be economically “devastating” for the region, Mr. Blair said. The political fallout from a break-up would be harder than the difficult politics needed to reach a deal to save the currency, he added.

Germany vehemently opposes using the European Central Bank as Europe's lender of last resort, saying that politicians need to establish clear political rules for monetary union and robust, automatic sanctions for violators of the restrictions on debt and deficits. Ms. Merkel and Mr. Sarkozy of France have said that euro-zone countries should allow European review of national budgets, and introduce “more automatic and more severe sanctions” on budget sinners. “There cannot be a single currency without economic convergence,” Mr. Sarkozy said in his one-hour address yesterday, “Or the euro zone will explode.”

Just as in Europe, US politicians are relying on ‘automatic’ measures to replace cohesive and responsible government which look more and more like a thing of the past. It appears now that automatic spending cuts of $1.2 trillion will go into effect because the elected government of the US cannot effectively budget in the case of Congress or execute in the case of the Administration. Not automatic are several issues the Congress must tackle by year-end. President Obama’s payroll-tax cut and unemployment benefits are both set to expire by 12/31. Additionally, payment adjustments to doctors by Medicare also expire year-end. And there’s that seemingly incessant need to fund the government, which runs out of money on December 16^th.

The economy may be getting better, but it’s becoming increasingly difficult to ignore the big gray cloud on top of the silver lining. Ms. Merkel of Germany emphases that her strategy has always been to use the crisis as an opportunity to achieve long-term change in the European Union. In Europe and in the US long-term solutions will not soon stem the crises we face, but they are vital if we are to escape the crushing weight of the gray cloud of debt. Automatic fixes will not get the job done either. As we consider our votes for Congress and President next year, we would all do well to listen for candidates who champion long-term remedies for our problems, not worthless tonics that leave nothing but the bitter aftertaste of more permanent debt.

Comedy or Tragedy?

Global investors and credit rating agencies alike are closely watching dramas on two world stages. The first is playing a very small stage with no audience and a limited run. The final curtain call for the Congressional Super-committee to reach their plan for cutting $1.2 Trillion from the federal deficit is just four days away, if you count the 48 hours required by the Congressional Budget Office to score it. The actors are evenly divided between protagonists and antagonists (depending upon your political point of view of course) working from the same economic script. In stark contrast, the second stage spans an area roughly the size of the southern and eastern United States, the actors are all protagonists, but in this drama each actor must work both from his own economic script while crafting a common script to save their European Union, their banking system, and their respective economies.

Prospects for the super-committee, a microcosm of Congress, delivering an effective deficit-cutting plan to its parent bodies are dimming as the deadline draws near. Comments from aids indicate that ideology continues to trump innovation and courage. In the event of failure, automatic spending cuts kick in starting January 2013. About half of the cuts will be imposed upon the Defense Department. While all of government could stand some additional belt-tightening, the idea of forcing 50% of the cuts on a department that accounts for only 20% of the federal budget seems truly moronic, particularly during a time of war and escalating global tensions. It’s also the part of the budget that directly creates productive jobs. Job creators in communities that house small and mid-sized military bases will feel the impact early, as will private military contractors and manufacturers. So in short, automatic cuts translate into an near-immediate direct and indirect jobs killer.

Some say that what Congress does, Congress can undo. But the theory ignores the potential for significant, even catastrophic political and economic backlash such actions will have. In part due to these threats, House Speaker Boehner has said that he feels “bound” to go along with the automatic cuts. Senate Majority Leader Harry Reid this week also ruled out any change to the cuts. More importantly, the credit rating agencies are watching Congress like hawks. They have already warned that failure to make significant cuts in the deficit will almost certainly result in further downgrade to US debt. The first one had no negative impact on markets. Lawmakers may not get another mulligan.

There is another and far better possible outcome that should the committee fail in its charge, Congress could take up the $4 trillion deficit-cutting package presented months ago by former Senator Alan Simpson (R., Wyo.) and former White House Chief of Staff Erskine Bowles. Many in Congress have publically heralded the panel’s work already, so it might be just the right port in the storm. However, passage would require not 51 votes as with the super-committee’s plan, but 60 – potentially too high a bar.

As politicians weigh the consequences of failure against the almost certain political backlash of being booted by voters, they will be compelled to get the job done. Unfortunately, what seems just as likely is that ‘the job’ will look and feel pretty much like the status quo that put us in this mess. As a country we are more fundamentally divided than at any time since the 1860’s. There is a clear division between Republicans and Democrats of Big vs. Small Government. But more fundamentally, those who produce in this country and shoulder the debt have had enough of the status quo two-party system and they have revolted bringing us as a nation to a decision next November. The ability to compromise is very nearly gone.

Truth is Congress really hasn’t compromised for years. The two parties have largely passed on the sum of their two budgets (billions in excess of receipts) to future Congresses and generations to pay with political and human capital. Next November as a nation we will decide whether we will continue in the direction of European-style Socialism or return (painfully at first) to our roots of private initiative and free-market capitalism.

On a stage across the Atlantic plays a more complicated drama, but with equal significance to our global future. The European Union consists of 27 independent member states, each with its own economic problems brought on by years of recession. The primary purpose of the Union is to promote policies aimed at ensuring the free movement of people, goods, services, and capital among the member-states, much like that which exists here in the United States. Unlike the US’ powerful Central Bank, able to exert extreme monetary influence over the entire country, the European Central Bank is anemic by comparison. In the EU there is only loose central governance, taxation (for healthcare) and policy direction. Whereas in the US policymakers have complete control over the states and banking system, EU officials must answer first to their own nation’s voters and agendas.

European Banks within the member states own huge amounts of each other’s sovereign debt. Investors currently fear that if one of the member states (such as Greece) defaults the capital required of banks might be jeopardized. If for instance Italy’s largest bank became undercapitalized due to a Greek default, it could imperil the already weak economy causing investors to lose confidence in Italian bonds, driving their prices down. Italian bonds, which comprise even larger amounts of European bank capital in their declines might hazard a Spanish bank’s capital, and the dominos begin to fall.

The two largest member-states Germany and France are publically arguing over the role of the European Central Bank ECB while delays are causing investors to lose confidence in the ability of the bank and policy makers to fend off a crisis. At issue is the structuring a 50% write-off of Greek debt which is the cornerstone the latest plan. Investors seem to have no more confidence in the latest plans then they do the three that have preceded it.

According to Bloomberg, since last month’s agreement, the euro has lost 2.3% against the dollar and borrowing costs on two-year Italian government debt have jumped 1.35%. The cost of insuring against a default on five-year Italian debt using credit default swaps has jumped 23% in the period. Near term the Euro problem is one of confidence, in both the imperiled member states and the Union’s ability to ward off future problems. But the long term issues are the same as the US faces, only more difficult to fix.

The dramas are coming to a climax. Politicians unashamedly use government largess to advance their own purposes creating huge national debts that are becoming irreversible. They threaten the very sovereignty of nations both without and within. Thomas Sowell once wrote that “Socialism, in general, has a record of failure so blatant that only an intellectual could ignore or evade it.” If politicians in this country and Europe continue their use of it to their own advantages, with the full support of a blithe intelligentsia and media, and with the unconditional support of voters forced into dependence, then this drama and the one in Europe will be written into history as the world’s greatest tragedy.

Back in the 80’s Bonnie Tyler asked “Where have all the good men gone? … Where's the streetwise Hercules to fight the rising odds? Isn't there a white knight upon a fiery steed? We need a hero.”