Well Well Mr. Obama, The American People “Get It”

By: Karl Denninger

I’ll be damned.

Two-out-of-three Americans recognize that their constitutional right to own a gun was intended to ensure their freedom.

The latest Rasmussen Reports national telephone survey finds that 65% of American Adults think the purpose of the Second Amendment is to make sure that people are able to protect themselves from tyranny. Only 17% disagree, while another 18% are not sure.

You mean that 2/3rds of the American people read The Declaration of Independence and understand the difference between a right and aprivilege?

We’re making progress folks.

Look, this is really a binary thing.  The Declaration asserts that:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed.

Government does not grant rights as government never possessed them in the first place.  Government may grant privileges but it may not infringe (under natural law) on rights.

This is the foundational principle of America. It does not matter if 51%, 66%, 75% or 99.999% of the people don’t want you to have one or more of your rights.

There is no legitimate act, whether by Congress, law, the Constitution or any other means to deprive you of your natural rights, because you are endowed with them by virtue of being human. 

Government may disrespect those rights but it cannot change the fact that you have them, no matter how much disrespect it shows. 

No man can take or restrict that which was not his to bestow in the first place.

If you don’t believe in this then you’re not an American, no matter where you were born.  You do not share American values.  You do not share the foundational beliefs that created and thus far have sustained this nation.  You are a traitor to Jefferson, Hamilton, Madison, Washington and countless others.  In advancing your views you are advocating violence against all in America, as the disrespecting of one’s natural rights is the initiation of force — the very definition of assault.

If you are an elected official and take any position or advocate any law to constrain the ownership of small arms by the people, as defined in our Constitution, you are deserving of immediate impeachment along with both civil damages and criminal imprisonment under 18 USC 242 and 42 USC 1983 for each person who suffers harm, no matter the form or degree, as a consequence of what you advance.

Yes, Obama and Feinswine, this includes (but is certainly not limited to) both of you.

You either believe all of the above or you are a proponent of slavery, the premise that one man is owned by and exists with the permission of another.

The Second Amendment is not a grant of a right by government to the people.  It is a declaration that your Right to Life and Liberty isunalienable and that because your Right to Life and Liberty is unalienable you are entitled to defend yourself against any tyrant that would take your life or liberty, whether that tyrant comes in the form of a rapist at 3:00 AM or an out-of-control government that is trying to murder you and shove you in the hole because of such factors as your religion, political beliefs, race or other characteristics.

The Colonists demonstrated their understanding of the unalienable Right to Life and Liberty at Lexington Common and Concord in 1775.  They were exactly correct in their actions then, and it is precisely due to their understanding of those unalienable rights that our nation and government exist today.

170 million people have been murdered outside of war by their governments in the last century.  Each and every one of those events was preceded by firearm registration, confiscation or both.  It is much more difficult to murder an armed citizen than an unarmed one, and it is especially difficult to commit mass-murder upon an armed population.

If you need more confirmation than Rasmussen provides just take a trip by your local gun store.  You’ll find empty shelves — they’re empty of both of weapons and ammunition.  You can take all the surveys you want by phone but the survey that matters is the vote that Americans express with their wallets, just as the political poll that matters is the one held on the first Tuesday in November.

The American people “get it”, by and large, and we must insist that all in every branch of  Government who refuse to both publicly confirm and act in conformance with same be immediately and permanently ejected from public office.

The Dark Side Of QE: The Next Chapter In Our Story

From: The Future Tense

Bernanke printing money to infinity
QE3: Full steam ahead.


The Dark Side Of QE: The Next Chapter In Our Story

I am about to tell a story with a very happy beginning and a very sad end. Unfortunately, it happens to be the story we are living in today, but because we are still in the happy part of the story most people cannot see what is coming ahead. I will provide that for you here.

The immediate knee jerk reaction to the Fed’s announcement today is that the Fed printing $40 billion per month and pumping it into the banking system is fundamentally strong for every type of asset in the world. Those that graduated from college in 2009 and have only been watching the market for a few years would believe this is a fact.

In essence: buy everything and just keep on buying.

Now that we know we are on the path of QE to infinity it is very important to understand how an endless running stream of new money fundamentally impacts assets differently. You’ll notice a repetition of the word fundamentally because for long periods of time assets can move in the opposite direction of their fundamentals. Think of the 100% par value of subprime mortgage tranches in early 2006 or the multi-billion dollar valuation of Pets.com in 1999. Over time assets have a tendency, like gravity, to revert back to their fundamental value. This is what causes booms, busts, opportunity, and disaster.

Before we go any further, let’s quickly review how QE actually works. The Fed shows up at the doorstep of primary dealer (the largest) banks with a printed bag full of money and asks them if they can come in and buy some mortgage bonds. The banks agree, hand them the bonds, and take the bag full of cash. The banks now have a new lump sum of money to spend or do with what they like. This is also new money that did not exist in the economy before which is how the money supply is increased. In reality, there are no knocking on doors with bags of money, this process takes place electronically with a few key strokes from either side. The outcome, however, is the same.


Part 1: The Positive Benefits Of QE (March 2009 – September 2012)

We’ll start with mortgage bonds as a completely separate conversation because the Fed has targeted this one asset as their choice of purchase. Mortgage bonds and mortgage rates will have an obvious fundamental advantage to the Fed purchasing them every single month. If the Fed decided they were only going to purchase blue Honda Accord cars every month, it would have a positive fundamental impact on the price of those cars.

The QE process of mortgage bond purchases has the immediate impact of lowering mortgage rates (a new larger buyer of mortgages in the market – higher demand equals lower rates). It also has an alternative impact due to the bag of money left at the doorstep of the banks. The banks can now take this money and spend it. They can purchase treasury bonds, corporate bonds, and municipal bonds (plus a few other assets we’ll get to in a moment).

This bond purchasing lowers the cost of borrowing for everyone as lower interest rates allow corporations, local governments, and the federal government to borrow more. This is the Fed’s second goal: to lower the cost of borrowing to stimulate the economy.

Stocks rise with the Fed easing in part for the very reason just discussed. If it costs corporations less to borrow money it increases their profits and allows them more opportunity to grow. QE also has the ability to push up stock prices because banks now have more fresh cash that they can put to work in the stock market.

The positive benefit of QE, the happy part of the story, is essentially what we have experienced since the first QE program began in March of 2009. Interest rates on every type of bond in America: treasury, corporate, municipal, mortgage, auto, credit card, and junk bonds have fallen significantly.

Stocks have soared, rising over 100% in the S&P 500 since the first QE began that March. This creates an immediate wealth effect for those holding stocks (their portfolio says $400,000 instead of $200,000 making them more likely to spend and boost the economy).

Corporate profits have surged with the lower cost of borrowing, the massive reduction in expenses (mostly through employee layoffs), and an increase in productivity.

Over the past 3.5 years when rolling out QE 1 & 2 the dollar index has moved sideways and even appreciated (due mainly to the over weighting of the index to the euro).

So far we have only experienced the good part of inflation. We have only experienced the high of the drug, and the buzz of the alcohol. If the story ended here today it would appear that QE was the correct decision all along and that the unlimited QE program announced today has no reason to be anything but positive.

But the story will not end here today. We will look now look at what comes next.


Part 2: The Dark Side Of QE (2013 – 2016)

This is where we move away from the fairy tale and back into reality.

When the Fed shows up at the bank with the bag of cash there is another asset class the bank can purchase with the money: commodities.

Commodities include agriculture (food), energy (oil and natural gas), metals (copper, steel, aluminum), lumber, water, precious metals, and every other tangible good in the world. Many of these items are either directly purchased by consumers (food and energy) or they are purchased as a byproduct of other items they use such as a car, shirt, or washer and dryer. This directly raises the cost of living for consumers. A higher cost of living means less disposable income and less money available to buy goods such as iPads, furniture, vacations, or cars. A slow down in spending in these areas not only impacts the stock prices of these companies, it spurs lay offs at them as well.

This is looking directly at the consumer side, but what about the corporate side? At the end of the day a company is judged (with its stock price) based on its ability to generate profits. If the cost of goods to produce rises (with rising commodity prices) and companies are not able to raise prices enough to offset those costs (which would occur if wages were not rising at an equal or greater pace) then profit margins fall.

Do you see, based on the fundamentals of economics, how inflation does not help the price of stocks. This is, in part, why stocks were crushed during the stagflationary period of the 1970’s.


What about bonds?

Bonds face a similar dilemma, only magnified. Why? Because bonds do not have the ability to raise prices the way a company can to offset inflation (even though we just saw how companies can only raise prices so far without choking off all demand). Bonds are set at a fixed interest rate. If the underlying value of the currency the bond is held in depreciates in value then the investor is trapped.

Many bonds today actually have a negative yield. This means that the cost of living is rising more rapidly every year than what is paid out in interest. Investors buying these bonds know going in that they are losing purchasing power. Why would anyone ever do this? I have no idea. Why would they purchase Internet stocks in the year 2000 at sky high valuations when the companies had no profits? Bonds today, like stocks then, are in a bubble. The madness of crowds has set in.

At some point, as new QE money enters the money supply and continues to depreciate the value of the currency there will be an awakening moment for bond holders. What will trigger this “moment?” I have no idea. But I know that it is coming. Those trapped inside the long term bonds that have been front running the Fed’s QE programs will suddenly realize that they are running in quicksand.

How about the currency itself? Paper bills. They have no interest rate risk right? They have no corporate margins to worry about right? Holding cash at the bank seems like the best available option.

In reality it will be ultimately be the worst. The only thing worse than a low interest rate during a period of high inflation is no interest rate. We live in a borderless world today where investors do not have to hold their money in a domestic bank (just watch what is taking place right now in Spain). Money can be moved to a bank in Switzerland, Hong Kong, Brazil, or Canada. It can also be held in those currencies at those banks.

This is what will take place at first slowly in America and then in a rush at the end. Most will likely not be allowed to escape as the borders are shut when the politicians realize what is taking place. Their money will be trapped inside the closed room being filled with water by Bernanke. Their purchasing power will drown.


How about real estate?

This is one of the favorites for those arguing for an inflation investment. The problem is that real estate is purchased with debt. If the cost of the debt rises significantly (interest rates rise) then the price of the asset is going to fall, even if the cost of building a new home is rising as well. This will only occur over the short term because we still have an enormous amount of untapped supply to mop up. It is only in a hyperinflationary environment, not a very high inflationary environment, that real estate will be a strong investment.

So after understanding why stocks, bonds, cash, and real estate fundamentally should go down in a high inflationary environment, what is the best investment option?



I have explained numerous times using historical examples and charts how we are in a long term secular bull market for commodities which began in the year 2000. Energy, agriculture, water, rare earths, and precious metals have been and still are my personal favorites.

If the Fed prints more money tomorrow there is no fundamental downside for the price of gold. There are no corporate margins squeezed. There are no interest rate risks. There is no dilution of the money. It is just a larger amount of paper money chasing a stable amount of physical gold. Throughout history that has only led to one thing: a price adjustment in the price of gold to account for the paper money that has been created.

Usually this happens very slowly over a long period of time and then very suddenly and violently at the end. Almost all of the entire bull market run in gold during the 1970’s happened in the last 90 days leading into January 1980. I think it will be the same this time as well.

For an in depth look into the inflation/deflation discussion see Would The Fed Printing $50 Trillion Tomorrow Cause Hyperinflation?

The Ant and the Grasshoppers

The Ant and the Grasshopper
The Ant and the Grasshopper

One of my favorite fables reminds me of the way America used to be not really that long ago: a nation of ants.  Here’s a quick summary:

The ant works hard in the withering heat all summer long, building his house and laying up supplies for the winter.  The grasshopper thinks the ant is a fool and  laughs and dances and plays the summer away.  Come winter, the ant is warm and well fed. The grasshopper has no food or shelter, so he dies out in the cold.

The moral of the story of course:  Be responsible for yourself!

Today, with roughly 50% of households in the US receiving some form of government payment, and nearly 50 million people on food stamps, it is obvious we have strayed far from our origins & the founders’ intent: a nation of sovereign individuals.  It’s easy though to assume that the grasshopper is the sloth citizen, unwilling to work hard and better themselves, preferring instead to wait around for government to take from the hard working ant and redistribute to them.  I submit that there are actually two other kinds of grasshoppers, though, and they are far more dangerous to what would and should be our nation of ants.

Attack Grasshopper

This breed, rather than creating his own wealth, wants to meddle in, conquer, and steal the wealth of other ants & grasshoppers in other fields.  Of course he does not do this himself, he sends other grasshoppers & ants of his own tribe.  He also often attacks the freedoms of individual grasshoppers & ants within his field, wishing to force his belief system and morality upon the others; he’ll subject them to random search & seizure & deny their rights to due process.  He’ll keep them indoctrinated with tales of “field exceptionalism” and the “call of duty”.  He’ll pretend to be on the side of the regular grasshoppers all the while using more of the confiscated ants’ wealth on his militarism.  He’ll keep them all in a perpetual state of fear.

Crony Grasshopper

This breed, rather than really work & produce actual tangible results, uses his resources & connections to keep one of his own in power.  In doing so, he siphons off resources and gets exceptions and special treatment that regular ants do not get.  Often he goes in & out of power with his fellow crony grasshoppers through a revolving door.  He takes “positions” that would seem to indicate he is “working” when not in power.  He fosters a fake divide of resentment & bitterness between red ants and black ants, thus providing the illusion of the possibility of “hope” and “change” to the ants & regular grasshoppers.  Also works closely with Attack Grasshopper cousins to increase his power & ability to skim off the system.  He’ll keep the ants complacent by taking from them just enough so they are still content with a “decent” life while giving to the regular grasshoppers just enough so they can get bye & he buys their votes.

A Nation of Ants

The big problem is that we’ve either had Crony Grasshoppers or Attack Grasshoppers in charge for as long as I can remember, and often a grasshopper who is a mix between the two.

What if there is one candidate of the current five presidential contenders who is himself an ant and not a grasshopper of any sort?  One who wants his fellow ants to keep what they earn, and he wants to strongly & staunchly defend their field, not plunder & instigate in the fields of others, nor perpetuate a system of cronyism.  What if he were elected?

50 Laboratories of Taxation

Let's localize the tax burden.

Typical of any election year, taxes have been a front and center issue.  Flat tax, fair tax, 9-9-9, end the IRS, “the rich” paying their “fair share”… we’ve heard it all.  A new plan I’d like to propose is one that clearly segregates the natural sovereignty of the individual, the state, and the nation.  The idea is simple:

Whatever taxes an individual state collects, it pays 50% of that amount to the federal government.

That’s it.  Some main points:


  • Federal income taxes are eliminated, on both corporations and individuals.
  • The IRS is eliminated – there’s no need for it as each state already has a department of taxation in some form.
  • Each state can implement its tax structure as it wishes, just as it is today.  Want a progressive income tax that makes the wealthy pay more?  Fine.  Want no income tax and only sales & property tax?  Fine.
  • Control is restored to the people.  It is far easier to change a politician or policy at the state level than it is at the federal level.  In the worst case, the citizen can vote with his/her feet.
  • The states act as a barrier between & check on a bloated federal bureaucracy violating of individual sovereignty.

Essentially the citizen becomes the taxpayer to the state, and the state becomes the taxpayer to the federal.  Think of it as the state paying a fee for belonging to the club and enjoying the benefits provided by the federal government.  At the same time, the fee is held to a reasonable level.  After all, if a state needs N dollars to effectively run its own government and provide the services that it provides to its citizens, there is no reason to think that the federal government should need more than the sum of all 50 of the various N’s to “provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity.”

Clean Air Regulations: Thoughts on Practicality

Smoking Tailpipe
Ready to be super-regulated?

The state of California today passed sweeping new automobile regulations today in an attempt to reduce pollutants & greenhouse gases.  These regulations include:

  1. a requirement that one in seven of the new cars sold in the state in 2025 be an electric or other zero-emission vehicle.
  2. a mandate to have 1.4 million electric and hybrid vehicles on state roads by 2025.
  3. a mandate for a 75 percent reduction in smog-forming pollutants by 2025.
  4. and a mandate for 34 percent reduction in greenhouse gas emissions over roughly the same time.

States surely do have the right to regulate commerce & emissions within their own borders, no argument there.  Let’s also ignore the whole greenhouse gas emission debate – it’s really not relevant to the discussion here.  What is interesting is the practicality of these “mandates”, particularly the first one, and how they could feasibly be implemented.

If there truly would be a requirement that one in seven new cars sold in the state be a non-traditional vehicle, this would imply that dealers must be constantly tracking car sales by type.  It would mean that customers potentially could go into their dealer, ready to put down a check for a new traditional gas/diesel vehicle, and be told by the dealer “I’m sorry, we’ll put you in the queue for that car, but until another electric vehicle is sold first, we can’t actually close the sale.”

Sound ridiculous?  Well, that’s what the regulation actually says: 1 in 7 MUST be electric or other zero-emission vehicles.  The only way to truly guarantee that is to have a real-time data system implemented that allows the sale of six traditional vehicles for every electric vehicle sold, and blocks subsequent traditional vehicle sales until the next electric vehicle is sold.  I wonder how much such a system will cost to develop, maintain, and utilize?

I have a feeling that the subsequent mandates #2-#4 are nothing more than assumed consequences of what will happen given that the sales ratio (mandate #1) is successful.  Would those numbers really work out in such a case?  Have they factored in that pollution is still generated by electric cars, just at the power plant rather than from the tailpipe?  One must assume so.

Wouldn’t it be far easier, far less intrusive, and far more friendly to individual liberty to simply adjust existing taxes & fees to achieve nearly the same goal?  Certainly there is an annual registration fee (I imagine quite high) to register a car in California.  Why couldn’t the same objective of promoting electric/no-emission vehicles be met far more easily by simply increasing the annual registration fee on traditional vehicles and/or decreasing the annual registration fee on electric/no-emission vehicles?

Regulators often get overly full of themselves, believing they can wield immense power to directly implement any desired result without giving thought to the consequences and impracticality of doing so.  One of the best features of our republic is having 50 laboratories of democracy each conducting their own experiments, and I for one cannot wait to see the results of this one.

New Math: State of the Union Speech 2012

New MathObama gave his State of the Union address last night.  It was filled with the usual glowing remarks about accomplishments, and grandeois visions of a utopian future which will (thank goodness) never come to fruition.  In terms of the economy, the President tried to paint a picture of slow but steady improvement.  He made no mention of the credit rating downgrade, the newly breached debt ceiling, the national debt exceeding 100% of GDP, nor the sure effects on America of the imminent European debt collapse.  He neglected to mention the most important entity in the world to investors around the world: The Federal Reserve.  He didn’t mention the passage & his subsequent signing of the NDAA and how that authorizes the executive branch to carry out indefinite military detention of anyone (including citizens) it deems ‘belligerent to the state’ without charges or trial.

So what did he mention?  Well, two particulars that he did mention were especially interesting, regarding the state of the budget & how he hoped to pay for his utopian programs.  And they just don’t add up.

 In the next few weeks, I will sign an Executive Order clearing away the red tape that slows down too many construction projects. But you need to fund these projects. Take the money we’re no longer spending at war, use half of it to pay down our debt, and use the rest to do some nation-building right here at home.

Let’s consider for a moment.  We have a current annual budget deficit of $1.4T give or take under the most optimistic circumstances.  That means we’re spending about $3.5T per year and pry tax revenues from the people of about $2.1T per year.  Let’s assume that indeed war spending is going to zero, that the costs of Iraq & Afghanistan truly are over (that’s a BIG assumption, but ok, let’s play along).  We spent about $160B in Iraq & Afghanistan on the books during 2011.  So if we no longer have that cost, the President would have you believe  we can use $80B to ‘pay down our debt’ and the other $80B for his stimulus construction projects.  The rub is this:

That isn’t cash in the Treasury that we are spending, that is $160B in borrowed funds.

In other words, if that expense does go to zero, it doesn’t leave you with $160B laying around in overflow, it means our budget deficit drops from $1.4T to $1.24T.  Yes, we are still $1.24T in the red even if the war costs disappear.  How exactly does that leave one with any money left over to do anything?  How can you be $1.24T in deficit every year and still pay down debt?

The other major sticking point in the address was a reference to the alleged ‘cuts’ made ‘automatic’ by the failure of the supercommittee:

When it comes to the deficit, we’ve already agreed to more than $2 trillion in cuts and savings.

Sounds good doesn’t it?  $2 trillion in cuts.  What he doesn’t say is that these ‘cuts’ are to be made over a 10 year period.  Reminder from above: we’re spending $3.5 trillion per year today.  Over the next 10 years, this is projected to increase at a rapid rate.  But let’s give the President the benefit of the doubt and assume the level increases at only 3% per year… that’s about $50 trillion total in spending over those 10 years – and he’s bragging that they’ve reached the grand level of cutting that by $2 trillion?  If we freeze spending at $3.5 trillion, we’d spend $35 trillion over that same 10 years.  So his $2 trillion cut is not a cut to current spending levels at all – it is a 13% cut in expected spending growth, not a $2 trillion cut in spending today.

Let’s keep in mind that the economy has been growing at nowhere near a 3% rate; 1% is more accurate, if even that much.  Since tax revenues can only be expected to increase at the rate of GDP, the gap between spending and revenues will grow ever wider, compounding at 2% per year under these assumptions, and the total debt will accelerate.  Additionally, interest payments on the existing and additional debt will swell to take up more & more of the budget, requiring even more printing and borrowing.

This President is ignorantly selling a fairy tale at best, at worst intentionally outright lying, with respect to our financial situation as a nation.  I tend to believe the former.  Much as he may believe his benevolent big brother utopian paradise may be attainable, mathematics is non-negotiable, and he clearly is either incapable of or unwilling to grasp mathematical reality.

What Would You Cut?

Cutting Money
Time for a trim.

With the debt & deficits gaining more attention everyday, focus in the Republican primary has to a large extent been on how to trim the size & scope of the federal government.  Rick Perry proposed cutting three cabinet level departments: Commerce, Education, and Energy.  Not to be outdone, Ron Paul went further, proposing cutting five: the departments of Energy, Housing and Urban Development, Commerce, Interior, and Education, together with other cuts to reduce $1 trillion in spending in year one of his presidency.

I’ve had discussion with more big government minded folk who exclaim: “but if you cut the Department of Education, how will we educate the children?”  Interestingly, the Department of Education was founded in 1980, so I respond with: “gosh I don’t know… since your parents were educated before the DOE existed, they must be absolute blathering idiots.”


The Elephants in the Room

While elimination of various redundant and constitution-stretching departments is certainly not a bad idea, there are two main elephants in the room that make up the bulk of the federal budget: entitlements and defense.  Most of these same Republican candidates, with the exception of Dr. Paul, who want to hack and slash at the department level show no desire to perform similar drastic cost cutting to the Department of Defense.  They give lip service to reducing the entitlement burden, but really at the end of the day propose little more than a dent in cost restructuring.  Worse yet, Democrats show little desire to affect any serious cuts in either defense or entitlement programs.  The debt to GDP ratio just recently rose above the 100% level, and absent a miraculous end to endless red ink after 2012, seems like it will only be accelerating higher.

Now is the time for bold action, not timid minor modifications to business as usual.