Wednesday, September 23, 2009

A Cautionary Look at Colorado's Financial Jeff Wright

The recent budget review released by the Colorado Legislative Council is sobering. More so, it seems, because the CLC is still fully bought into the mainstream scenario of a slow-moving recovery through 2010 and then a return to "normal," rather than the classic "dead-cat bounce" we are actually experiencing. That scenario will prove to be deadly to the budget process in the next two legislative sessions. The top-to-bottom restructuring of state and local government should begin immediately, not continue to engage in fiscal and financial chicanery and gimmicks. It should have started last session, but the Democrats and the Governor snuck through the session with a ton left undone, a hope and a prayer.

In order to understand what needs to happen in the state, it is important to understand the larger picture. Last September, when I first forecast a $1 billion shortfall, the CLC opened with $300 million which they escalated in December to $600 million, then $800+ million in the next report. They didn't get to $1 billion until the final numbers came in June 20, 2009. Meanwhile the Governor's office was so far off the mark as to be completely laughable and reflects the fairy-tale, 'Alice-in-Wonderland' environment in that office.

The shortfalls will most likely continue for the next two quarters, maybe less, then look to be in recovery in the late spring and summer of 2010 before falling off the cliff again. That will occur as the-already-generated fake dollars of the stimulus, credit and monetary injections and other deficit spending programs by the federal government continue to push money into the economy for a time. That will end when there is a final cut-off by the international buyers of our debt.

The stock market bounce likely won't last that long. However, perception combined with key market players' ability to move ahead of the market, is a powerful tool on the side of the Keynesians for a period of time. They can put their money in and take it out in time to move to hard assets before the back-end inflation created really hits the masses. Key market players are actually initial beneficiaries of the coming inflation, since they get their hands on the money closest to the point of release from the government and central bank. In the flow of the defined Austrian credit cycle that behavior is expected prior to the broad inflationary effects taking over.

If inflation has set-in by then, as some forecast in mid-2010, it will make the numbers look better even while the real value of the transactions are falling, i.e., home prices, for one example. Home prices will actually begin to show a recovery and escalation again. I believe, the manipulation of the Keynesians in charge of government and central bank policy are still effective enough that a massive inflationary (20+% annually) scenario is still 18-24 months off or longer. We may not arrive at hyperinflation (100+% and then go logarithmic shortly thereafter) before there is severe global monetary readjustment and replacement of the global dollar regime with regional currency systems. With 70% of the global transaction currency afloat represented in dollars, the other nations will have no choice but to move to protect themselves as the states must move here.

One key indicator here will be a strong move away from the dollar as the oil transaction currency of choice. When the deal, to make all OPEC oil transactions priced in dollars, was sealed with Saudi Arabia in 1973 it put a 30- year prop under the dollar after President Nixon removed us from the Gold standard in 1971. That deal gave the U.S. 30+ years of open field running to receive a direct subsidy from the rest of the world. In order to buy their oil the rest of the nations of the world had to obtain dollars to do so. The Fed and federal government were more than happy to comply, multiplying the number of dollars available by orders-of-magnitude above the real growth of our productive economy through direct supply ("printing") and deficit spending. When that subsidy ends so does the dollar, money printing and deficit spending. Our trade and fiscal deficits, globalization and outsourcing movements, and the expansion of credit and subsequent crash are all sourced back to those two policies: Removal of the dollar from the gold standard in 1971 and OPECs agreement in 1973 to only price oil transactions in dollars. The sub-prime and credit crisis are symptoms, not causes, of our larger monetary and debt crises 30-plus years in the making.

Colorado must move to protect itself from the sudden explosion and then implosion of Federal spending and money printing. It will fool many people for a period of time and skew the statistics, but in the end the only states that won't go down with the Federal government and the dollar will be those that are in some way, any way, prepared. We have so little time and so much to do. After the constant propaganda spiel proffered by central bankers of the Fed, government officials and the media it should be realized that time grows even shorter. Denial and misdirection are powerful indicators of the final correction.

States must begin to take effective steps to find ways to isolate themselves from the ultimate fiscal and financial degradations of the Federal government and the dollar. When this whole mess really starts to come undone, the more independent states will have the flexibility and ability to recover much better. Colorado already has some head starts on other states. However, we need to stretch our lead.

It is highly recommended for all Colorado legislators to read through the points by Ray McBerry on the link below. McBerry is a candidate for governor of Georgia who has put forth a comprehensive plan for a return to sovereignty in that state. It contains elements of the plan originally developed in Colorado during 1994 (the sequester fund to go with HJR94-1035-10th Amendment Resolution) as well as the Montana Gun bill and other ideas. Adding things such as HB09-1206 (developed by Rep. Lambert and Sen. Lundberg), for state payments made in gold and silver, makes it quite a package. Put together as a package of bills it offers a very powerful beginning to limit federal incursions in any state:

Those that follow the Austrian school of Economics do analysis based on behavior not statistical snapshot data. Watching the behavior is much more indicative of outcome than gross statistics spouted by the econometric, "scientistical" Keynesians. That's why they failed to see this coming. Austrians are much more attuned to the behavioral aspects of the capitalists, workers and consumers not the statistical output. That makes it much easier to forecast ahead of mainstream estimates for revenue drops based on the behavior rather than snapshot statistics. The process is well described in Mises, "Human Action."

Jeff Wright (a long-time, classic liberal activist living in El Paso County)