There's an old saying in the US Army that "there is nothing more dangerous than a second lieutenant and a map." The gist of this rather unkind sentiment is that a second lieutenant (the most inexperienced officer rank) has a lot of authority, as well as a lot of training, but does not yet have the experience to have the big picture. Everyone who has ever been a second lieutenant has heard that saying, and its effect is to make them more humble and more open to learning so that they do get the big picture as quickly as possible, as most of them rapidly do.
While we respect Glenn Beck's formidable ability to communicate and educate, it occurs to us that when it comes to economic matters, he is a bit like the second lieutenant described above. He knows just enough to be dangerous, and he has a position of great influence, but he does not have the big picture, and the theorists that he is listening to are leading him astray. He has absorbed a kind of "Cliff's Notes" of solid Austrian capitalist economic theory, but not the entire system, and it is leading him to make frightening economic pronouncements that have the power to scare a lot of people.
Yesterday on his November 3 show, Glenn Beck argued that the reason jobs have not been coming back is that "we don't make anything here anymore" and therefore we have to borrow money from "our bank," the Chinese. However, they aren't going to want to give us anymore money, because they don't have any confidence in our ability to make anything, and that everyone will lose 20% of their money -- if the Fed's untested plan even works, which it probably won't.
He suggests that this may all be part of a conspiracy to bring the dollar down, in order to impose a single global currency, much like the euro in the European Union.
It all sounds very logical, and scary, and Beck trots out enough "Cliff's Notes" economic theory (accompanied by talented cartoon illustrations on his chalkboard) to scare the average viewer into complete paralysis.
However, like the proverbial "second lieutenant with a map," it is trying to provide direction, but it is heading the wrong way.
Readers of our blog will know that we are no fans of the oversteering Fed and the devaluation of the US dollar (see for example here and here and here). Neither are we fans of excessive government spending, and have written about that previously as well.
However, Beck's arguments -- that the dollar is really just an IOU that is becoming worthless since "we don't make stuff here anymore" and that the Chinese are "our banker" who give us money and may decide to stop doing so -- do not follow from the above two observations, and they echo almost exactly the Cliff's Notes economic theory touted by Peter Schiff, who was telling all his clients to bet against the dollar and invest in foreign securities in 2008 (which was exactly the wrong thing to do at that time, as it turns out). In fact, we wouldn't be surprised to see Peter Schiff appear as a guest on Mr. Beck's show, or learn that the two have had conversations about economic theory**.
We provided a link to a video with some of Mr. Schiff's comments, such as his arguments that America was on the way to becoming a "banana republic" because we've thrown away our industrial base and have become "just a phony service-sector economy," and some counter-arguments to those incendiary remarks, in a post back in December 2008 (the chart in that post shows that we are manufacturing more here in the US than ever before!).
America is still an innovative, growing economy that produces an absolutely staggering array of goods and services. How can Beck and Schiff say with a straight face that America doesn't make anything anymore? Does Microsoft still make software? Does Apple make iPhones? Did a little company in Pennsylvania invent and manufacture the drill bit that broke through to rescue the Chilean miners a few weeks ago? It's true that iPhones may be assembled in other parts of the world, but their design and software come from Silicon Valley.*
The actual fact is that China and other countries hold US bonds not out of some sense of paternalistic good-will towards the US, as we explained in a post from May of this year, but rather because America remains a vibrant, growing, innovative economy -- far more vibrant and growing than almost anywhere else in the world. When a world crisis strikes, the demand for American bonds and American dollars goes up, not down, which proves this point.
Also, while we do not believe the Fed needs to implement QE2, and have said all along that the Fed should stop the easing already (but that Bernanke's Phillips Curve fascination keeps him afraid of deflation instead of inflation), the experienced, insightful and freedom-loving economist Scott Grannis explains here why Beck's explosive description of the latest Fed move is not exactly in line with what is really going on.
We believe investors should be very careful when someone is preaching a doom-and-gloom scenario filled with quasi-economic theory. The Fed has been practicing an inflationary policy for decades, to one degree or another, and investors do need to be aware of that. But, as we have argued recently, we believe that growth and innovation are the best way to combat this decades-long policy.
Glenn Beck should stop underestimating the resilient capitalist system we have here in the United States and the growth and innovation that it allows (growth and innovation that was even present during the dark hyperinflationary days of the 1970s). He obviously has absorbed some decent economic theory, but like a brand-new lieutenant, he has not yet accumulated the experience to go in the right direction when it comes to making economic pronouncements.
Investors who are driven to panic by these sorts of dire predictions from people they see on TV should understand these matters.
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* At the time of publication, the principals of Taylor Frigon Capital Management did not own securities issued by Microsoft (MSFT). At the time of publication, the principals of Taylor Frigon Capital Management did own securities issued by Apple (AAPL).
** For those readers who do not believe they sound alike, we provide below a partial transcript of Glenn Beck's remarks from the November 3 show, and suggest they compare them to the arguments of Mr. Schiff such as those voiced in this December 2008 interview which was linked in our December 2008 blog post referenced above:
Well, when you devalue the dollar so much that people say, “I don’t think it’s going to be worth anything anymore; I don’t think it’s going to be any good.” When you devalue the dollar or when you just keep spending money, and then you start to print it, well today the Fed announced – now this is the Fed – they’re going to buy government debt – they’re going to buy Treasurys themselves – that’s $600 billion to buy government debt. Let me show you something: when the Fed says they wanna buy it [holds up a dollar] – this is an IOU -- that says – this is a Federal Reserve Note – that’s what it says, right at the top, Federal Reserve Note, this is the Fed, promising you that they will give you a dollar – of gold (it used to be gold or silver, not anymore) – they’re gonna buy now, the Fed, $600 billion dollars, this is what they call quantitative easing. I know what you’re thinking: “I’m sure my neighbors don’t know what ‘quantitative easing’ is.” Here it is – simple definition: the government buys stuff to stimulate the economy. OK. You’re now thinking: “Well that’s not new for this administration.” You’d be right. But there is a difference here. Quantitative easing – this kind – where we are buying our own debt and printing the dollars to be able to buy that debt, is really kind of the last bag of antibiotics.
[. . .]
That’s the last line of defense. That is the “big-dog” antibiotics. Once those antibiotics don’t work on you: [falsetto voice] “bye-bye.” Well after stimulus packages – that’s like, I don’t know, amoxicillin or z-pak – then bailouts (ooh, that’s a little stronger) – then more stimulus package, more bailouts, reducing bank interest rates to zero or close to zero . . . we’re out! We got nothing left. Here comes the nurse with a bag of really strong antibiotics . . . What does it tell you? That Obama’s Keynesian philosophy of “spend our way out” has not worked. It won’t work. We need to re-set ourself. This is the “Hail Mary.” This is the final spending attempt. This is the last line of defense, or, as I have called it now and warned you that it was coming, I’ve been telling you that it would be the “Weimar Republic” moment. It is largely untested and unconventional – I mean, sure, Zimbabwe tried it. It’s a huge gamble. It is probably the biggest bet in history, and the biggest bet in the history of the planet, but all the chips . . . are yours.
And here’s how it works. Right now we’re having a problem . . . with jobs. One of the reasons we don’t have jobs is: we don’t make anything here anymore. WE don’t make ANYTHING. Why don’t we? Pensions is one reason. You can’t make stuff in America because it costs too much.
[. . .][vignette about unions sending money to Congress to get them to borrow money][. . .]
Don’t worry, we’re gonna borrow the money. Bonds. Bonds. Remember, what is this? This is an IOU – remember that! An IOU. Don’t worry, we’re gonna borrow it, so we can buy stuff. We borrow it – where do we get it? This is us, going for a mortgage. Who’s our bank? The Chinese. Well, here’s the problem. At some point, the Chinese say: “Yeah . . . you know, I don’t think so, guys. This is junk bond status. I don’t think you’re gonna pay us back, because you guys are spineless, and you’re in bed over here, and the whole system is corrupt. I don’t think your country is ever going to be able to make ANYTHING ANYMORE. So I don’t think we’re gonna buy your bonds.”
Well, that’s what they’re afraid that is coming, they’re afraid this is gonna happen. We have to pay – we have to raise interest rates – we have to raise the yield on bonds, say, we’re gonna pay you 10%, 15%, 20% in profits -- just take a bet on us, will ya? It’s like a credit card, when you’re a bad client they just jack your interest rates? They’re afraid that’s coming – and it is coming! China won’t give us any more money.
So, what do we do? Instead of being reasonable and having this guy go back and saying, “you know what? No! We can't do any of that” --
Instead, they’re going to bypass the Chinese, and they’re going here. These are the bankers. Now, I thought we hated Wall Street people, and banks, they – they’re evil. Right? No, no, no! This is actually the Fed. What is the Fed? Don’t worry. Just a collection of big bankers, you know, the Goldman Sachs people -- we don’t really know for sure, because we’re not allowed to look – oh, that sounds honest!
So you go to the bankers, and the bankers say, “Don’t worry! We’re gonna go to the Treasury, and print more money. We’ll just print more money, and we’ll take this money off the printing press and buy your bonds, so you can help out the unions.” That’s fantastic. You know where that leaves us? EXTRA BROKE! It leaves us with nothing in the end.
At the time of publication, the principals of Taylor Frigon Capital Management did not own securities issued by Goldman Sachs (GS).
[Editor's note -- after this post was published, Mr. Beck quoted Mr. Schiff by name in the episode that aired later that day (November 04, 2010), confirming the thesis put forward above].
For later posts on this same topic, see also:
- "European debt issues and the primacy of growth" 11/08/2010.
- "Be centered, be still -- 2011" 03/17/2011.