The Year That Was 2012

As readers of the Daily Capitalist know I, as a purveyor of unconventional economic wisdom, have a different take on … well, (almost) everything. I have some thoughts on the year 2012, a retrospective if you will of the really important economic issues in 2012. I and others here have written extensively about these issues this year. There are tons of issues I’ve not mentioned, but these are the big ones that stand out. Please bear with me.

1.  The Recovery That Never Came

This is probably the real top economic story of 2012 because it led to a number of policies and events (below). Despite massive public spending (Keynesian fiscal stimulus) and unprecedented money “printing” by the Fed (monetary stimulus or QE), the economy stagnates and unemployment remains high.

One may wish to ask why these Keynesian/Monetarist nostrums have failed their task. I have a quick answer and that is they have never worked to revive any economy from a depression, ever. Our GDP has been in the doldrums all year, except for a recent blip which was entirely a figment of new money, not any underlying real, organic growth. There is nothing out there that will revive our stagnating economy in the near future.

2.  QE 2.5, QE3, and QE4 (Money Printing)

The Fed has been pumping massive amount of “money” into the “economy.” The fancy word for it is quantitative easing, but it is no different than had they just printed more banknotes and distributed them to their cronies. If you look at the measure of this, the Fed’s balance sheet, it is at historic highs. Since November, 2008 the Fed has “printed” about $2 trillion of “money” created out of thin air. Now they have announced what is, in essence, QE Infinity. That is they intend to print more money until they see unemployment come down. Again, one may wish to ask why the five preceding QE’s failed to achieve the Fed’s goals, and since they failed, why do we need more? The quick answer here is that we don’t need more, it doesn’t work, and it destroys real wealth which leads to further stagnation. If printing money was the key to wealth and prosperity, then why is there so much poverty in the world?

3.  Worldwide Economic Decline

While we are fixed on the events in Greece it should be noted that the entire world is in economic decline, and that includes China. While juggernaut China is growing, their growth has declined substantially since 2010 (from 11.9% in Q1 2010 to 7.4% in Q3 2012). China merely reflects the status of their major trading partners, the U.S. and the EU. The EU countries have been slowing as well and for some time. Yes, this includes Germany. Is this a coincidence? Well it could be that world’s economies are tied together in trade, but the main reason is that almost all of these countries follow the same unsuccessful economic policies that we here in the USA practice. The depressing thing is that all I hear is that world leaders promise more of the same failed policies. The outlook for positive growth, assuming they keep spending, racking up debt, and printing money, is not good.

4.  The Constitutionality of Obamacare

You are free to not eat broccoli, but if you don’t the government will impose a penalty on you. This penalty is really just a tax and since the government has the power to tax for all sorts of reasons, they can tax you if you don’t eat broccoli.

This is the logic of Justice Roberts argument in the Obamacare case that was handed down in June.

This should not surprise us because the Constitution is whatever the Supreme Court Justices wish it to be. Now they have handed the government another mandate to regulate our behavior. As we know they can and do regulate our behavior already. For example, if you smoke, they will tax your habit heavily. It is not a giant leap in this line of thinking to force you to do something they want you to do by penalizing you for not doing it. According to the Court’s ruling, there is nothing in the Constitution preventing them from doing this.

The Constitution has been gutted by the Supreme Court, and their butchers work continues. The Founders’ fear of a powerful central government has been betrayed by the Court. Our original constitutional limitations on federal power have been ground down by redefining the Constitution to suit government goals. A Court can now find constitutional authority for almost anything the government wishes to do. This is the legacy of the “living constitution” philosophy.

5.  The Economic Impact of Obamacare

Once an entitlement takes hold it is impossible to get rid of it because it creates its own constituency of voters who will seek to perpetuate their benefits. Once it is fully implemented it will create a further drag on the economy. Why? Can anyone name any government program that has not wildly exceeded its initial cost/benefits estimates? The answer is no, of course. As it fails to meet consumer needs, as all such systems do, the power of government’s regulation of the entire health care system will grow and eventually costs will be capped and service will be rationed. There not one national health care system in the world that is not going broke and failing to deliver the quality of health care that we have now. Eventually the burden on the private economy from taxation to support the system will be so great that permanently high unemployment and economic stagnation will result. This is similar to Europe and it cannot be sustained.

6.  The Fallout of the 2012 Election Cycle

The Republicans continue to run bad candidates. That nice fella, Mitt Romney, tried to be everything to everybody and his policy inconsistencies failed to inspire voters. I dislike Mr. Obama’s Progressive policies, but I know exactly where he stands and what he’ll do. Voters liked his vision.

The only candidate that made any sense was Ron Paul, and while you may say that his run was quixotic, his candidacy did more to raise the consciousness of people about the proper role of government and the flaws in our economic policies. That is always a positive.

What is significant about the election is the rise of the “47% percent”. As was pointed out by liberal commentator Jonathan Chait in a New York Magazine article, “We Just Had a Class War (And One Side Won).” What was obvious, he said, is that the 47% is now the 51%. I hope he is wrong, but I believe he might be right. Is this the time in history when we Americans become a majority of takers than producers? Is this the tipping point that so many other countries reached where their social welfare programs led them into economic stagnation and eventual bankruptcy? I think we have reached that tipping point. We have only to argue the timing of its failure.

The only difference between us and our European friends is that we have a stronger entrepreneurial infrastructure that is cultural in its nature. Our system consists of a vast capital base provided by venture capitalists and a financial reward structure that inspires and drives entrepreneurs to succeed. So far, there is nothing quite like it elsewhere in the world. That entrepreneurial system drives our economy. Let us hope it doesn’t stop.

7.  The Fiscal Cliff

Excuse my language, but what a crock the Fiscal Cliff is. All I hear from the media is doom and gloom because taxes will go up and government spending will go down. They posit a solution: how much can we tax ourselves to pay for the spending. No one focuses on the real problem which is out of control government spending. The Administration puts out phony number on so-called ”spending cuts” and insists on raising taxes on the rich even though such taxes are a literal drop in the fiscal bucket and does nothing to solve the problem.

And we have a big problem. No one in Washington, Democrat or Republican, has proposed any serious spending cuts. The reformers just talk in terms of reducing the rate of spending increases. Based on the entitlements the government has promised, plus our current national debt, we have unfunded liabilities that are estimated to be between $78 trillion and $128 trillion. There is not enough money to pay for it. The economics of all this is that the more the government spends the worse the economy will do. Nothing they do with the money they spend leads to prosperity. Only we, the private sector, create wealth for the government to spend. Eventually government spending will consume so much of GDP that the economy will falter and then the well dries up. This is not hysteria; it is happening all over the world – Greece is just one of the more “advanced” examples.

Don’t believe that the politicians will do any meaningful spending reform. It won’t happen. They have promised and promised over the years yet spending keeps climbing. I think falling off the Fiscal Cliff is probably a good idea.  The automatic spending cuts they are arguing about are only about $110 billion a year, but at least it’s a start. Otherwise they are incapable of cutting spending.

Is it all doom and gloom? Well, yes. The world is taking a wrong turn and we, our children, and several levels of our descendants will bear the weight of our mistakes. I, unlike many of my fellow bloggers, don’t see a collapse of civilization on the horizon. These welfare states can last quite a long time. In the U.S. we have built up vast amounts of capital and wealth over the last 150 years and it could take a long time before it is gone. There are, of course, things that could send us over the edge soon(er), but I don’t see them on the horizon (yet). Don’t be looking for hyperinflation, riots in the streets, or military coups here.

Don’t dispair. Because you read the Daily Capitalist, you are on the right path. You think, you read our free market Austrian economic ideas and our classical liberal political views, which are the ideas and ideals that have been responsible for the forward march of history. I can say that these ideas are more widespread now than they have been in the past 80 years. We can change things. It is through the power of our ideas that this will happen. It won’t happen overnight. But you can join in the fight by promoting these ideas, by supporting organizations* that promote these ideas, and by doing your best to create wealth for you and your family.

Here in Santa Barbara it rained last night and this morning it is sunny. The world keeps turning. Best wishes to you all in 2013.

 

* Mises.org, Cato.org, Reason.com, FEE.org, CEI.org, Independent Institute.

EmailPrintFriendlyShare

13 comments to The Year That Was 2012

  • dd

    nice piece of work, Jeff, i really enjoyed that … not in the sense that it was a tad gloomy, but it’s the here and now and was very well articulated. thank you.

    i agree that civilization will not collapse, and i do not believe there will be material civil unrest here in the USA, at least any time soon. stagnation, decimation of what was such a wonderful and growing dream of upward mobility, and general gloom, but not military coups.

    i do think in the next 3-5 years that rioting is a strong possibility.

    somehow we seem to keep it together. it’s truly remarkable to me. i hope that continues but have my doubts.

  • D

    Wonderful post!

    I do encourage others to do as I have done, and invest some part of your net worth somewhere other than the US — just in case.

  • Joseph Constable

    dd says Jeff’s post is a tad gloomy. The tenor of his post is lament in my opinion. I believe that Romney, who is criticized by those who voted for Ron Paul because Romney just wasn’t good enough to vote for, was the last chance to turn away from our headlong stumbling over our own feet into Europeanism. Romney needed to be this way or that way or the other way. Sort of like voting in the rapist and blaming the victim. Romney would only make incremental changes. We wanted immediate return to sanity. We sure showed those conservatives.

    Romney was all about the micro economy, i.e., getting burden off of businesses. But he just wasn’t monetarily pure enough. The two parties are the same so we vote for the really bad one to stick it to the guy who provided the most hope of changing the status quo. He disappointed us so we didn’t vote for him. We sure showed him. I am pro-gridlock now but guess what, they voted to extend and expand the stripping of our citizenry of their privacy and liberty. I wasn’t represented at the table and neither were you. And we won’t be invited because we are not playing the game.

    Like Jeff, I live in California. Nationally we are now California. My oft heard refrain, ‘once a corrupt liberal patronage system power structure reaches critical mass, it cannot be undone’, now applies to the nation.

    I won’t cut off my ear. I will relish the reality. I can play the game as good as any public union member or corporate CEO. I already have formed a buying collective to buy in Nevada as I go their frequently by van on business coming back empty. I am in a nascent bartering group exchanging things like dentistry for home grown vegetables. Recently a tax preparer offered to exchange his services for some welding. Hunted European boars are going to be divided up among those who paid for the hunt (mostly the cost of gasoline the rifle being paid for a long time ago). I know someone giving classes outside the community college system and being paid in cash. I would like to see the unofficial economy grow by 10% over the next 10 years. I have absolved myself of any sense of citizenship. The lefties won. They always do. They actually believe in corruption. Then they flounder and we have at lot of rubble. I don’t intend to be found under it should it happen in my lifetime. An Austrian economics based economy will have to wait a few more generations.

    And I will continue my studies of economics and international finance in the evenings. It is really enjoyable. Life goes on.

    • Well, those of us who supported Ron Paul actually didn’t vote for him because he wasn’t the nominee. Romney lost because he had no ideology that anyone could grasp. No vision. He wasn’t even a reasonable alternative to Obama; just another me too Republocrat.

      As to the underground, the money to be made is above ground. Spend your time creating wealth.

      Thanks for your comment.

      • bigmac

        There is lots to lament. But all is not lost. Remember that Obama only won by 350K votes in the swing states, and lost about 7M votes from 2008. Clearly, the public is not enthusiastic with him, nor does it provide much for a “mandate” the MSM would have us believe he won.

        Romney had fewer votes than McCain not so much because folks were looking for a “Ron Paul”, as there were many “conservatives” (not necessarily Ron Paul supporters) that did not find Romney believable and stayed home, while those dissatisfied 2008 Obama voters were equally confused and unconvinced, also staying home.

        Contrary to much commentary about the “brilliance” of the Obama campaign team and their “superior skill” at data mining/GOTV (I think Obama’s nominal numbers 2008 vs 2012 show the folly of that argument), I think it was a failure with the Romney team (and perhaps, by extension, the “establishment GOP” for backing his nomination). Yes, GOP had to fight the bias in the MSM – a major hurdle, but doable. Romney/his campaign just did not cut through with a clear image of who he was and what he’d do – too often he left important topics unaddressed vs making a clear case for some set of principles (economic and foreign policy). His governing history was not consistent with an alternative vision to Obama. When it seemed he was making a bold leadership statement, he frequently appeared to back-track.

        I look at the “Fiscal Cliff” “negotiations” and shake my head at the strategic incompetence of the GOP leadership, and the lack of backbone on basic principles they have. So this fuels my pessimism.

        On the other hand, I have optimism driven by how vocal the dissenting point of view has been and continues to be in America. One need not look too hard at other countries to find that the voices for principles of liberty are much weaker. It is rather robust here. Daily Capitalist is an excellent example.

        Circling back to my earlier discussion on the electoral numbers, we only need convince somewhere between 5-10% of the voting population to swing things away from the Dems. We must target the “convincable” and engage them directly.

        A modest proposal:

        One way we can each individually contribute to the cause, I propose, is that in addition to the DC, we each participate in discussions on blogs that don’t normally appeal to us (as unpleasant as that might be), but are where the “convincables” might be. Our purpose would be to put forth well reasoned, focused, and pity comments/arguments in our favor (refraining from sarcasm, name calling or ad hominem, or emotional attack, etc. – this will not convince the “convincable”). As the MSM continues to lose readers/viewers, and the Net increasingly becomes the source for news and opinion, this approach will work in our favor.

        Beats waiting around for the perfect candidate to run for office or just bitching (or blowing off steam) on blogs like this one, IMHO.

        Anyway…happy and prosperous 2013 to you all!

        • Joseph Constable

          I believe that Romney would have surprised everyone. I think he “got it”. It is just so difficult to campaign against the presumptions liberals put out there in the media. Romney was never a good campaigner. He couldn’t turn around the implieds of his opponent like Guliani and Gringrich could so so well.

          I continue to be angry with libertarians for taking the position that since Romney wasn’t good enough we will elect someone who is diametrically opposed to our beliefs.

          bigmac is on to a really good idea. How about the GOP buying advertising time on TV with short commercials getting out their vision. And do that now. Not wait for the next election. Libertarians should do the same.

          • bigmac

            Joe, thanks. Like you, I did not see that we had the luxury to vote our “conscience/philosophy” this go around, but rather we needed to “hold our nose” be “strategic” to at least buy some time to correct course (and maybe much more – if the selection of Paul Ryan as VP mate was any indicator). I think every “libertarian” or “conservative” had to make an assessment this last election on the acceptability of another four years with Obama.

            My assessment was that we could not afford the current course on the deficit, nor a repeat in the level and scope of economic regulation, nor a continuation of the divisive nature of the current WH administration. To me, those are so far off course I think we are headed for an economic crisis. This will come too dangerously close to igniting a political crisis that would make all other (libertarian and conservative) considerations irrelevant, IMHO.

            I see comments on blogs like the DC, ZH, etc., where folks have big talk, like “bring it on”, “the sheeple ‘own it’”, etc.. That’s a bit like blaming the driver for running the red light, while crossing the street on the walk signal in front of that car. They underestimate just how volatile and risky a full blown political crisis would be.

            Less than a hundred years ago there was great economic crisis in a European democracy where there was a charismatic orator who consolidated power under emergency measures.

            Maybe its just me, but I am much less confident than those commenters that it wouldn’t happen here. My optimism for America and what she stands for took a major hit on election night. Today, while still optimistic, I have grave concerns.

  • Janeb

    Great article. America IS going bankrupt. What will you say to your kids when THEY say “he’ll, no, we won’t pay” and cut your entitlements like pensions? Sorry dad, screw you they’ll say.

    Future generations will NOT pay for OUR recklesseness. The lessons of history. Coming to America.

    • dd

      Janeb: agreed. this is my biggest fear, and inter-generational conflict. i also agree that taking more than was put in, at the expense of future generations, is about as sickening as it gets. deplorable, immoral behavior.

      it’s so ridiculous i can’t even believe that is what is happening, and yet the American Sheeple are too busy watching American Idol, most don’t even understand the problem, much less the solution.

      • Joseph Constable

        I actively advocate young people I know to rebel against their blood sucking bommer parents.

        • dd

          yes Joseph, and they will. not because they want to, but when one is painted into a corner, there is no other outcome.

          i’m glad i’m somewhere in between both generations, it spares me the awkwardness and the pain. but a shootout at the OK Corral is coming, it’s simply inevitable. 3-5 years, maybe more, but it’s coming. it’s just math.

  • Well thanks Jeff, you started my New Year off just great with this dose of reality regarding our nation’s inexorable decline.
    Our politicians have convinced every American,regardless of his efforts, that he should live as well as those working ten times harder. Our elected representatives have also convinced the beneficiaries of multiple entitlement programs that they will never be taxed for same – someone else will pay. And woe to the politician who does not promise expanded benefits that we can no longer afford to pay – he will be voted out of office in favor of a more “accommodating” official.
    We need a savior but none is in sight.
    Really nice article that people need to think about.
    Thanks.

  • [...] Our Austerians Learning? – Krugman, NY Times On Krugman’s Epiphany – Bruce Krasting The Year That Was 2012 – Daily Capitalist Brief Holiday Update – Hussman Funds 2012 in Review – Noland, [...]