Archive for June, 2011

Will Stocks Bottom Out on 20 Jun 2011?

Will_Stocks_Bottom_Out_On_20 Jun_2011 <==  PDF version

What will happen to the stock market on 20 Jun 2011?  I’m sure you would like to know.  I don’t have a clue, but according to a business cycle theory first proposed by Martin Armstrong [1], Monday 20 Jun 2011 should represent a “turning point” with regard to “volume and liquidity” in the stock markets.  Apparently his theory was successful in predicting the large declines in the stock market that occurred on 19 Oct 1987 and 27 Feb 2007.

In any case, the theory predicted major high points (the beginning of protracted declines) starting on 12 Dec 1989, 20 Jul 1998, and 27 Feb 2007.  On the other hand, it predicted major low points (the beginning of protracted increases) starting on 25 Aug 1985, 1 Apr 1994, and 6 Nov 2002; it predicts another one for 18 Jun 2011.  But since the market was closed yesterday, perhaps the low will occur tomorrow.  If so, look for the Dow Jones to close below 11900 and the S&P to close below 1050, which would be a considerable dive, given that it closed at 1271 on Friday.  After this decline, the theory indicates a long protracted increase.

The theory predicted that an intermediate high should have been reached on 19 Apr 2009, but as we all know, the low point of the last crash occurred in fact on 9 Mar 2009, just a month earlier.  Maybe a minus sign got flipped somewhere; who knows.  Will stocks go up or down Monday?  Flip a coin and have a nice trading day.

The theory also predicts that there will be an intermediate turning point downward on 6 Aug 2013, just so you know.


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On a Balanced Budget Amendment

On_A_Balanced_Budget_Amendment <== PDF version

The idea of adding an amendment to the U. S. Constitution requiring a federal balanced budget has been circulating since the Reagan era.  Although it was proposed a few times in Congress over the years, it was never able to attain the required two-thirds affirmation in either House of Congress, which is necessary before any proposed amendment can be sent to the States for consideration.  But with the large budget deficits of the past 5 years or so, this concept is coming into fashion again.  A recent poll [1] shows that a large majority of Americans now favor such an amendment.  Advocates for a federal balanced budget amendment argue two points. First, they point out that most states have this requirement; the logic being, what is good for the states is good for the federal government.  Their second argument is that the Congress would be forced to prioritize spending and balance those priorities with tax policies necessary to meet the revenue requirements.  It is this lack of restraint, they say, that caused Congress to run up large deficits in nearly every year since the Carter administration.  Generally the advocates allow two exceptions to the balanced budget rule: a) when the nation is in a state of war or some emergency; and b) by a supermajority of both Houses of Congress.

It appears to me that a balanced budget amendment is a bad idea whose time has come.  First, there is no reason to believe that what is good for the states is necessarily good for the federal government, since they have inherently different duties.  States do not have a role in foreign policy; they do not manage wars; they do not manage the currency.  All of these pertain to situations relegated to the federal department because they represent existential threats; the cost of combating these, should it ever become necessary, must be paid.  More than that, they must be paid regardless of any budget deals made by Congress.  As for the stated exceptions, they will either be too restrictive (and thus potentially deadly), or so loose and subject to interpretation as to result in more talk than action.  The great fallacy in the whole concept of exceptions is that no mention is made of who shall determine the conditions under which an exception applies consistent with the separation of powers between the President and the Congress.  Shall conflicting claims of emergencies be arbitrated by the Supreme Court?  If so, we would surrender our fiscal situation to robed masters who may not even understand the question, or who might impose their ideology on the budget.  If not, we are back to the usual rhetoric between the President and the Congress — all pain, no gain.

As to the advocates second line of reasoning, I doubt it will actually restrain Congress.  Keep in mind that a considerable portion of the federal government’s spending is considered “off-budget”.  In this context, “off-budget” refers to expenditures that are not called out on any budget document, including, at the present time, a) Social Security, b) the Postal Service, c) some funding for the wars in Iraq, Afghanistan, and Libya, and d) all of the bailouts.  Fortunately, both on-budget and off-budget status is included when calculating the impact on the national debt.  But under the proposed amendment, balancing the “budget” will be easy: Congress can simply relocate all the excesses to new categories of “off-budget” spending.  It will not force Congress to set priorities in the normal sense of the word.

If any “balanced budget amendment” is to be considered, it must first specify that all revenue and all expenditures by the federal government must be included in the definition of “budget”.  Otherwise, Congress will simply continue to expand the fiscal deceptions and fail to make progress on achieving fiscal stability.  In order to force Congress to face the actual facts, we should require, if anything, a “zero-deficit” amendment rather than a “balanced budget” amendment.

[1]        Sachs/Mason-Dixon, 27 May 2011.  The results indicated that a balanced budget amendment is favored by Republicans and Independents by 81% and 68% respectively; even Democrats favored it by 45%.

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Washington’s Circular Letter of 8 Jun 1783

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The year 1783 was not an easy one for the thirteen newly-independent former British colonies.  Although formal hostilities had ended, the British continued to interfere with commerce.  Congress under the Confederation was proving to be a weak and useless institution, unable to meet its financial obligations, and unable to force the states to meet their obligations to Congress.  The financial situation was so bad, in fact, that there were a few conspiracies in which some attempted to enlist the aid of the army to force the states to make good on the requisitions imposed by Congress.  General George Washington had himself defused such a conspiracy in Mar 1783, in which some of his senior officers had attempted to instill a revolt in the ranks because Congress had not been able to pay the men.  Congress continued to seek authority to establish a steady and reliable revenue stream, but the states were opposed to it.

It was at this time that George Washington, as commander of the army, but intending to resign his commission, took the initiative to outline to each of the 13 state leaders his view on necessary reforms.  He wrote a circular letter to each of the governors or presidents of the thirteen states, explaining the current situation as he saw it and what would be necessary to ensure that the Revolution had not been in vain.  His letter was made public, and was widely published throughout the states in the summer of 1783.  It was an early recognition that some move toward a more firm union of the states to replace the ineffective Articles of Confederation was necessary.  Washington wrote in part [1]:

“The citizens of America, placed in the most enviable conditions, as the sole lords and proprietors of a vast tract of continent, comprehending all the various soils and climates of the world, and abounding with all the necessaries and conveniences of life, are now by the late satisfactory pacification, acknowledged to be possessed of absolute freedom and independency; they are, from this period, to be considered as the actors on a most conspicuous theater, which seems to be peculiarly designated by providence for the display of human greatness and felicity; here, they are not only surrounded with every thing which can contribute to the completion of private blessings, by giving a fairer opportunity for political happiness, than any other nation has ever been favored with.  Nothing can illustrate these observations more forcibly, than a recollection of the happy conjuncture of times and circumstances, under which our republic assumed its rank among the nations; the foundation of our empire was not laid in the gloomy age of ignorance and superstition, but at an epoch when the rights of mankind were better understood and more clearly defined, than at any former period, the researches of the human mind, after social happiness, have been carried to a great extent, the treasures of knowledge, acquired by the labors of the philosophers, sages, and legislatures, through a long succession of years, are laid open for our use, and their collected wisdom may be happily applied in the establishment of our forms of government; the free cultivation of letters, the unbounded extension of commerce, the progressive refinement of manners, the growing liberality of sentiment, and above all, the pure and benign light of revelation, have had a meliorating influence on mankind and increased the blessings of society.  At this auspicious period, the United States came into existence as a nation, and if their citizens should not be completely free and happy, the fault will entirely be our own.

Such is our situation, and such are our prospects: but notwithstanding the cup of blessing is thus reached out to us, notwithstanding happiness is ours, if we have a disposition to seize the occasion and make it our own; yet, it appears to me there is an option still left to the United States of America, that it is in our choice, and depends on their conduct, whether they will be respectable and prosperous, or contemptible and miserable as a nation; this is the time of their political probation, this is the moment when the eyes of the whole world are turned upon them, this is the moment to establish or ruin their national character forever, this is the favorable moment to give such a tone to our federal government, as will enable it to answer the ends of its institution, or this may be the ill-fated moment for relaxing the powers of the union, annihilating the cement of the Confederation, and exposing us to become the sport of European politics, which may play one state against another to prevent their growing importance, and to serve their own interested purposes.  For, according to the system of policy the states shall adopt at this moment, they will stand or fall, and by their confirmation or lapse, it is yet to be decided, whether the Revolution must ultimately be considered as a blessing or a curse: a blessing or a curse, not to the present age alone, for with our fate will the destiny of unborn millions be involved.

With this conviction of the importance of the present crisis, silence in me would be a crime; I will therefore speak to your Excellency, the language of freedom and sincerity, without disguise; I am aware, however, that those who differ from me in political sentiment, may perhaps remark, I am stepping out of the proper line of my duty, and they may possible ascribe to arrogance or ostentation, what I know is alone the result of the purest intention, but the rectitude of my own heart, which disdains such unworthy motives, the part I have hitherto acted in life, the determination I have formed, of not taking any share in public business hereafter, the ardent desire I fell, and shall continue to manifest, of quietly enjoying in private life, after all the toils of war, the benefits of a wise and liberal government, will, I flatter myself, sooner or later convince my countrymen, that I could have no sinister views in delivering with so little reserve, the opinions contained in this address.

There are four things, which I humbly conceive, are essential to the well being, I may even venture to say, to the existence of the United States as an independent power:

First.  An indissoluble union of the states under one federal head.

Secondly. A sacred regard to justice.

Thirdly.  The adoption of a proper peace establishment.

Fourthly.  The prevalence of that pacific and friendly disposition, among the people of the United States, which will induce them to forget their local prejudices and policies, to make those mutual concessions which are requisite to the general prosperity, and in some instances, to sacrifice their individual advantages to the interests of the community.

These are the pillars on which the glorious fabric of our independency and national character must be supported; liberty is the basis, and who ever would dare to sap the foundation, or overturn the structure, under whatever specious pretexts he may attempt it, will merit the bitterest execration, and the severest punishment which can be inflicted by his injured country.”

He then went on at some length to explain each of the first three main points: 1) that the federal government requires certain essential enforceable powers; 2) that creditors must be paid faithfully, and a certain means of revenue put in place, and secondly, the soldiers of the army must be fairly compensated; 3) that the militia is the backbone of the nation’s defenses.

[1]  John C. Fitzpatrick, editor, The Writings of George Washington from the Original Manuscript Sources 1745-1799, Washington: The United States Government Printing Office, (1938); Vol. 26, pp. 483-487

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A False Claim for a “Living Constitution”

A_False_Claim_for_a_Living_Constitution <== PDF version

There are a significant number of people to buy into the argument that the U. S. Constitution should be a “living document”.  It is not just some crackpots who believe it; it is embraced by a fair number of educated people, some of them educated in constitutional law.  Before I examine a supposed justification for the “living constitution”, it is useful to spell out what is meant by that phrase.  The underlying philosophy of the “living constitution” sect (for it is a civil religion) is that the U. S. Constitution was a great advancement in the 18th century, but is now obsolete. With the advent of technology and industry that supplanted the agricultural economy of the colonial period, it is necessary, they claim, for the government to expand its powers as it sees fit in order to do good, help the people, to pick economic winners and losers, and to regulate the activities of business and the people for the common good. These expansions of power are justified, they claim, because it is all done for the benefit of the people.

It is pretty obvious that the intent of the founding fathers was to create a limited government with limited specified powers, as stated in Article 1, Section 8 of the Constitution.  The main idea was to protect individual liberty as much as possible, consistent with peace and stability.  But the advocates for the “living constitution” sometimes attempt to find a justification for the arbitrary-power model of government in the writings of the founding fathers themselves.  Mr. Garrett Epps does so in his essay of 1 Jun 2011 [1], titled “Constitutional Myth #2: The Purpose of the Constitution is to Limit Congress”.  It is true that the Constitution was intended to create a federal government that had viable powers, unlike the Congress under the Articles of Confederation.  Congress under the Articles was simply too weak to function as a viable government, and it was obvious that some new form of government was required.  That is quite different than saying the Constitution was designed to allow the federal government to anything it wanted.  Mr. Epps claims in his article that Alexander Hamilton viewed federal powers as unlimited. To do so, he quotes a sectio from Hamilton’s Federalist #34:

“There ought to be a capacity to provide for future contingencies as they may happen, and as these are illimitable, in their nature, it is impossible safely to limit that capacity.”

Mr. Epps uses this passage in isolation in an attempt to show that Hamilton regarded the federal government as having arbitrary powers, including one to create more powers, and the power to use them all as it saw fit in the future.  There are two fallacies here.  The first is that Mr. Epps fails to point out that the Federalist #34 is part of a long sequence on taxation (numbers 30 through 36) in which Hamilton expends great effort t show that federal and state taxation are compatible, can be efficiently collected, and are devoted to different expenses.  The federal expenses that Hamilton had in mind here are mentioned two paragraphs later in the same essay:

“What are the chief sources of expense in every government?  What has occasioned that enormous accumulation of debts with which several of the European nations are oppressed?  The answer plainly is, wars and rebellions; the support of those institutions which are necessary to guard the body politic against these two most mortal diseases of society.  The expenses arising from those institutions which are relative to the mere domestic police of a State, to the support of its legislative, executive, and judicial departments, with their different appendages, and to the encouragement of agriculture and manufactures (which will comprehend almost all the objects of state expenditure), are insignificant in comparison with those which relate to the national defense.”

Secondly, Mr. Epps declines to point out that Hamilton had, a few days earlier in the Federalist #33, discussed the fact that only specific powers were conferred to the federal government.  In his discourse on taxation, Hamilton addresses objections to the “Supremacy Clause” (Article VI).  The critics had claimed that this and the power of taxation would be the “pernicious engines by which their local governments would be destroyed and their liberties extinguished”.  But Hamilton explains:

“If a number of political societies enter into a larger political society, the laws which the latter may enact, pursuant to the powers intrusted to it by its constitution, must necessarily be supreme over those societies, and the individuals of whom they are composed.  It would otherwise be a mere treaty, dependent on the good faith of the parties, and not a government which is only another word for political power and supremacy.  But it will not follo from this doctrine that acts of the larger society which are not pursuant to its constitutional powers, but are invasions of the residual authorities of the smaller societies, will become the supreme law of the land.  These will be merely acts of usurpation, and will deserve to be treated as such.”

It is clear that Hamilton regarded the powers of the federal government to be limited; otherwise, how could he claim that laws contrary to the constitution are acts of usurpation?  I is true that we the people have grown lazy and have failed to call acts of usurpation by their real name. The only fix for that is education.  I would urge everyone to read the Federalist Papers, so as not to be misled by those like Mr. Epp who wish to impose arbitrary government upon you.  It is clear that neither Hamilton nor the other founders implicitly advocated the notion of a “living constitution”.


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