Hennessy's View

One single legislative act will stop government overspending in its tracks.

In 1978, Representative Jack Kemp (R-NY) proposed legislation (which had no chance of passage in Tip O’Neill’s Democrat Congress) designed to stop the government from defrauding investors with inflation: bond indexing.  The measure would have the additional value of discouraging government spending.

Ronald Reagan and Milton Friedman endorsed Kemp’s proposal.  Let’s dust off this bill and push it through Congress as a memorial to Jack Kemp.

What Is It?

Bond indexing requires that all government issued bonds must be retired at their current value.  In other words, the maturity payment of Treasury bond is face value plus inflation over the period of the bond’s life.  This keeps interest rates down, since the bond is guaranteed to match inflation, and prevents taxpayers from paying taxes on a loss, should inflation exceed the cumulative interest the bond paid.

Why Do We Need It?

Borrowing is great for governments.  As the US government continues to break every borrowing record in the books, it realizes — just as it did in the late 70s — that the easiest way to retire these debts is inflation.   A trillion dollars owed 10 years from now isn’t that much money if the annual inflation rate is, say, 25 percent during those 10 years.

If inflation threatens to wipe out the interest earned on the bond, lender will require much higher interest rates.  That Treasury buyers now settle for yields of about 3 percent on 10-year notes tells us the borrows do not expect much inflation–or they they plan to dump the bonds before inflation picks up.

Once inflation enters the scene, everything changes.  If I expect today’s dollar to buy $.50 worth of goods and services three years from now, I’ll want each dollar of that bond to be worth at least $2.00.  I get that return through higher interest rates–inflation plus something for the use of my money.

But the government taxes the lender on the return, so higher interest rates to cover inflation must go higher still to cover additional taxes.  So if I want to realize a gain of 3 percent over 10 years after taxes and inflation, I’ll need a very high interest rate should inflation kick up.

That yield-inflation-tax spiral destroyed the American ecnonomy in the 1970s, and threatens to repeat itself in the next 10 years.   The government is simply borrowing too much, too fast, to sustain long-term, predictable growth.

What Can I Do?

Ask your Congressmen and Senators to introduce legislation requiring that all Treasury bonds be indexed to inflation. And treasure having shared the Earth with such as Jack Kemp.

More on Kemp:

Kemp’s Playbook

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In the battle between conservatives and statists, a fundamental difference seems to lie in the meaning of a concept found in the Declaration of Independence:

Governments are instituted among Men, deriving their just powers from the consent of the governed[.]

The dispute is how men convey consensual powers to their government.

Conservatives believe that governmental power is conveyed exclusively through the Constitution; statists believe power is conveyed through elections.  In this dispute, statists are simply wrong, provably wrong, and wholly unwilling to engage in a proper debate because they know they’re wrong.

Does the Constitution Have Meaning?

For the statists to be right in claiming that elections, not the Constitution, determine our government’s just powers, then they must provide a rational explanation for the Constitution.    Just as the atheist cannot explain joy or subatomic particles that preceded the Big Bang, the statist cannot explain the Constitution were just powers derived from elections.  Instead of a Constitution with means for amendment, the founders might well have adjourned after penning the first 4 sections of Article I.  Unfortunately for the statist view, they continued.

In fact, the Constitution and its Amendments make clear that the Constitution itself is the only conveyance of just powers from the people to the government.  Article I Section 9 limits the authority of Congress, and the Bill of Rights limit the power of the government as a whole.  The 10th Amendment prohibits the federal government from doing anything that is not explicitly authorized by the Constitution.

Were the intent to simply authorize elections by which Congress may do whatever it please, why did the founders waste so much time and treasure in crafting these details?  Why doesn’t the 10th Amendment, and all other paragraphs that limit government power, end with words to the effect:  "Or whatever the government feels like doing."   Instead, the founders specified that government is limited to specific powers.  As Jacob Hornberger writes:

The argument [that elected officials would trample rights of citizens without Constitutional positive statements of rights] partially failed and partially succeeded. It failed to stop the passage of the first eight amendments, but it ensured the passage of the Ninth Amendment: “The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people,” and the Tenth Amendment: “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”

If elections alone determine the limits of government power, then the Constitution has no meaning oustide of its first four sections on the holding of elections.   But the Constitution does have meaning, and no statist would argue otherwise.

Consequences of Constitutional Meaning

If, on the other hand, the Constitution has meaning, then its meaning must be uniform and final.  No article or paragraph is more important than any other.  The means by which Representatives and Senators are elected is no more important than the 9th Amendment or Article V.

If the Constitution is the vessel through which power, derived from our Creator, is transmitted, in part, to the government, then any act of government that is not directly authorized by the Constitution is illegal and anti-Constitutional, just as sin is anti-God.

If the Constitution has meaning, then those who willingly advocate for anti-Constitutional government activity–Cap and Trade, the Department of Education, etc.–are anti-Constitutionalists.  They seek to destroy all limits on government power.  They advance a government capable of anything, up to and including genocide.  To the statists, the Constitution is an evil burden that must be isolated, ridiculed, and destroyed.

And they are winning.

Challenge

I will personally debate any statist to defend "Resolved:  The results of an election neither increase nor decrease the just powers of the US Government."

–Bill Hennessy

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The statists are moving faster through the Constitution than Hitler moved through France.  Today, Democrats in the House of Representatives voted to advance a bill to socialize medicine without debate.

House Democrats went on record again in favor of advancing the legislation while allowing only limited debate, which would hobble the ability of Republicans to wrest concessions on one of Obama’s top domestic priorities.

Accelerating the Banana Republic

In the past week, the administration has encouraged political prosecution of former Bush administration officials, has opened the possibility of prosecuting CIA agents, has submitted legislation to give him sole authority over the Internet in the United States, and has released sensitive National Security documents to give terrorists an upper hand.

While the Tea Party movement concentrates on limited government and fiscal responsibility, the establishment of a Central American-style dictatorship in the United States cannot be ignored.  It’s clear that Obama intends to secure powers similar to Hugo Chavez’s and the Castros’.  By the 2010 election, Obama could own all major US banks, the auto industry, the healthcare field, most major newspapers, and, effectively, the Internet.  His opposition will be unable to fund a campaign or communicate with potential supporters.

In the meantime, Obama continues to undo free markets.  He has refused repayment of TARP funds from solvent banks in order to maintain control.  He has threatened to convert those debts into common stock, making his regime the dominant shareholder.  He has fired General Motors’ board and CEO, replacing them with puppets.  He has imposed salary limits on executives of bailed-out companies and has threatened to extend those limits to all businesses.

Most cruel joke of all, however, has been played by Hitler & Co. on those German capitalists and small businessmen who once backed National Socialism as a means of saving Germany’s bourgeois economic structure from radicalism. The Nazi credo that the individual belongs to the state also applies to business. Some businesses have been confiscated outright, on other what amounts to a capital tax has been levied. Profits have been strictly controlled. Some idea of the increasing Governmental control and interference in business could be deduced from the fact that 80% of all building and 50% of all industrial orders in Germany originated last year with the Government. Hard-pressed for food- stuffs as well as funds, the Nazi regime has taken over large estates and in many instances collectivized agriculture, a procedure fundamentally similar to Russian Communism.  [Emphases mine.] (Time, 1938)

Substitute "Obama" for "Hitler" and "United States" for "Germany," and you have a pretty good idea what we’re headed toward.  The article explains why Hitler progressively siezed businesses and industries:  he needed them to for his massive social programs.  Hitler built a mighty military, true.  He also provided healthcare, food, housing, clothing, and work to every German, Austrian, and Czech.

Hitler created quite a national youth service program, too.  It gave young poor kids hope.  They wore uniforms and learned skills like picking up trash, marching, throwing granades, and spotting Jews.

Stay Involved

To combat statism, remain active in the Tea Party movement.  Print and save important information you find on the Internet.   Stay connected with the people you met on the Riverfront or Kiener Plaza.

The American Revolution did not end when Cornwallis withdrew.  It rages on against tyranny and despotism.  It was waned, gone soft, in the affluence of its success.  But the revolution is now in the gravest dangerous since the Republic launched.  History will record your contribution.  Make your posterity proud.

Flood the House Switchboard

Don’t call just YOUR Representative.  Call 5 on Thursday, April 23.  Call early.  Lock up the switchboards.  Let them know that we surround them.

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**Scroll for Updates**

Ronald Reagan and Jack Kemp wanted to index everything, especially Treasury notes and taxes.  By "indexing," we mean tying rates (interest and tax) to the inflation rate.  Calls for indexing subsided after Reagan and Volcker did what Ford and Carter could not:  whip inflation now.

With a $2 trillion deficit this year and multi-trillion deficits projected as far as the eye can see, inflation will return to ravage the American consumer.  To make a former Economics professor happy, inflation deteriorates the purchasing power of a dollar.  (Happy, Bruce?)  But it does more than that.  Here are 5 horrors of inflation that will come to pass thanks to your U. S. Government:

Tax Bracket Creep:  When your household income exceeds $110,000 (married filing jointly) a year, you lose a lot of deductions.  For instance, the child tax credit.  As wages inflate to keep up with costs, millions of tax payers will cross this threshold and lose deductions.  In fact, it’s common for a family’s take home pay to fall as a result of pay increase.  You take home $60,000 a year after taxes and deductions, you get a $10,000 raise, and you’re now taking home $53,000.  Fun, isn’t it?

Interest Rates:  Interest rates represent the price of cash and are most sensitive to inflation.  If I lend you $1,000 for 10 years, the interest I charge must, at least, cover inflation.  If inflation is 2 percent over the period, then I would charge 2 percent interest and you would pay me $1,218.99 in year 10.  I break even.  If inflation is 18 percent (and that’s not unlikely), to break even I charge 18 percent interest and in 10 years you pay me $5,233.84.  Big difference, huh? That’s compounded annually.  Compounded monthly, far more common, and you have to pay me over $5,900.

Investments Lose Value:  Having seen the effect of 18 percent inflation on a $1000, 10-year loan compounded annually, you can see how careful you’ll be before investing.  Would you buy a 10-year T-bill at Friday’s closing rate of 3.84 percent if you knew inflation over the next 10 years would be 10 percent?  Of course you wouldn’t! You’d lose money.  (To perform an easy future value calculation in Excel, type =fv([rate],[# periods],0,[present value]), for example:  =fv(.0384,10,0,1000).  A more accurate method for solving bond pricing with Excel is explained here.)

Quality Plummets:  If you were born before about 1968, you probably remember that the 1970s saw lots of really crappy, low quality junk on store shelves everywhere.  It wasn’t just a change in tase, it was a response to inflation.  When prices of goods and services rise faster than consumers’ incomes, manufacturers and retailers must find cheaper goods and services to fill a given need.  Jack-in-the-Box was caught mixing oatmeal in its hamburgers.  Plastic furniture replaced wood, steel, and leather.  Polyester replaced wool and cotton.  Men let their hair grow hideously long to save money at the barber.  While you can argue all you want that buying low quality costs more in the long run, if you need toilet paper today, Charmin’s higher quality at $5.00 a roll does you no good if have $3.00 to spend.

Savings Dwindle:  If you know the dollar in your pocket today will be worth $0.65 tomorrow, you’ll spend it today.  During periods of high inflation, the marginal propensity to consume skyrockets.  True, it skyrocketed during the relatively low inflation periods of the 1990s and 2000s, but just wait to see what happens when generations of spenders meet years of high inflation.  And every new round of fast spending drives prices higher, as more money chases after fewer, crappier goods and services.  Why not buy that $5.00 hamburger today since it will cost $5.50 tomorrow and $7.00 next week?

These are just 5 horrors of inflation.  Please use the comments section to provide your inflation horror stories.  If you have any tips to help people prepare for and deal with high inflation, please add those, too.

Why would the government touch off inflation?  Perhaps because, in the short term, inflation tends to help the poorest quintile, according to Heinz Herrmann.  While the inflation devastates the poor in the long run, a period of very high inflation over the next 2 years will allow the party in power to say, "Look, your wages have increased 10 percent since we took office."  Of course, their taxes will have gone up 12 percent, prices 15 percent, and their standard of living will have fallen.  But who wants to wallow in those sordid details?  This administration is all about hype.

MORE:  Gateway Pundit reports that Obama is killing jobs faster than any U. S. President in history.

*UPDATE*  Fed is shocked–Shocked!–that multi-trillion dollar deficits are driving up interest rates instead of stimulating home buying.  I suppose they don’t teach Finance 501 in Harvard’s MBA program.  With interest rates rising, home buying will slacken, economy will sink.  Hello, Jimmy Carter.  Drude reports that NYT will carry Monday morning story of tension gripping Obama’s economic team.  About friggin’ time.

While we’re at it, one of the best — if not THE best — article on what’s wrong with the Obama economic plan is on NY Times today.  Read it.  It’s very long, but you must read it.  Cohen and Lewis skewer the White House like no one I’ve read to date.  Intelligent, informative, penetrating, and convincing.  This is the op-ed that could topple Obama’s house of cards.

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