Generational Dynamics: Forecasting America's Destiny Generational
 Forecasting America's Destiny ... and the World's


Generational Dynamics Web Log for 16-Jul-2010
16-Jul-10 News -- Health care plan damages the economy

Web Log - July, 2010

16-Jul-10 News -- Health care plan damages the economy

Congress passes sweeping financial restructuring

Obama health care plan does real damage to the economy

In September of last year, I called Obama's health care bill a proposal of economic insanity. I explained that the health care bill was basically a proposal for price controls and rationing of health care, a recipe for total disaster.

We've seen this before, in 1971, long enough ago that apparently no one remembers what an unmitigated catastrophe it was.

President Richard Nixon imposed wage-price controls and screwed up the economy so badly that it didn't recover for years.

One of the stories that I remember was that farmers in New Jersey were drowning chickens. The problem was that chicken feed was a commodity whose price was determined by the international commodities markets, and so its price could not be controlled, while the prices of chickens WERE controlled. So the prices of chicken feed went up, and the prices of chickens stayed the same, meaning that farmers could no longer afford to raise chickens. So they drowned the chickens, leading to a big shortage of chickens.

The wage-price controls did not control inflation at all, and Nixon was forced to repeal them in 1974. They were such a disaster that they provided additional motivation to Congress to threaten impeachment and force Nixon to resign.

Now we're already beginning to see exactly the same kinds of things happen with respect to the health care plan. This is not an accident: Price controls and rationing can never work more than temporarily, and always cause enormous new problems.

One problem at the time the health care bill passed was that nobody had read the bill, even the legislators that passed it, and nobody knew what its consequences would be. Now, the conservative think tank Cato Institute has read the bill and come up with a report, Bad Medicine: A Guide to the Real Costs and Consequences of the New Health Care Law (PDF).

The following is from the Executive Summary:

"The length and complexity of the legislation, combined with a debate that often generated more heat than light, has led to massive confusion about the law's likely impact. But, it is now possible to analyze what is and is not in it, what it likely will and will not do. In particular, we now know that:

  • While the new law will increase the number of Americans with insurance coverage, it falls significantly short of universal coverage. By 2019, roughly 21 million Americans will still be uninsured.
  • The legislation will cost far more than advertised, more than $2.7 trillion over 10 years of full implementation, and will add $352 billion to the national debt over that period.
  • Most American workers and businesses will see little or no change in their skyrocketing insurance costs, while millions of others, including younger and healthier workers and those who buy insurance on their own through the non-group market will actually see their premiums go up faster as a result of this legislation.
  • The new law will increase taxes by more than $669 billion between now and 2019, and the burdens it places on business will significantly reduce economic growth and employment.
  • While the law contains few direct provisions for rationing care, it nonetheless sets the stage for government rationing and interference with how doctors practice medicine.
  • Millions of Americans who are happy with their current health insurance will not be able to keep it.

In short, the more we learn about what is in this new law, the more it looks like bad news for American taxpayers, businesses, health-care providers, and patients."

All of these problems are as expected by comparing Obama's health care bill to Nixon's wage-price controls. In both cases, there are enormous dislocations, huge additional costs, and failure to control costs.

Obama was about ten years old when Nixon imposed wage-price controls. So you would think that he would remember Nixon's disaster, and run away from it as fast as possible, but instead he's simply doing what Nixon did, with the same results. Obama is thus the new Nixon.

I've said repeatedly that President Obama's health care bill is economic insanity, and each day that goes by seems to prove it more and more.

Congress passes sweeping financial restructuring.

The overhaul of financial regulation passed by Congress is the greatest since the 1930s Great Depression.

Here are some of the main points of the 2,300 page bill, according to the WSJ (Access):

I said that "Finding the next bubble" above must be a joke, but really the whole thing is something of a joke. Many of these regulations were enacted during the 1930s, and were ignored or repealed by the Boomers and Gen-Xers who didn't want to be bothered with regulations. These new regulations are just following the same 1930s script.

Most of these new regulations are meaningless at present, because the 2,300 page bill leaves it to regulators to write the actual rules. This will take several years, and will involve millions of dollars of lobbying by banks.

In the meantime, banks are still extorting 30% interest rates from their credit card customers, and using the money to pay themselves million dollar bonuses, and the same abuses that led to the 2007 financial crisis are still being perpetrated. The bill will accomplish nothing, and the worst by far of the financial crisis is yet to come.

Illinois leaps into the list of the world's defaulting governments

As we reported a few days ago, the state of Illinois is close to bankruptcy, and is not even paying its bills. As bad off as California is, Illinois seems to be even worse.

On Thursday, credit market analysis firm CMA Vision posted the following table of probabilities of default:

    Highest Default Probabilities:

Entity Name CDS Price Probability of default --------------------- ---------- ------------------------ Venezuela 1246.41 56.59% Greece 799.75 48.91% Argentina 915.10 45.91% Ukraine 580.90 33.52% Pakistan 506.90 29.42% Dubai/Emirate of 483.12 28.69% Iraq 433.60 26.54% Illinois/State of 315.00 24.21% Iceland 334.74 23.33% Romania 360.84 22.48%

The second column lists the price of credit default swaps (CDSs) for the entity's debt.

Recall that a credit default swap (CDS) is a kind of insurance policy on debt that pays off when the underlying debt defaults. When CDS prices rise, it means that investors are increasingly afraid that the underlying debts will default. Prior to the 2007 credit crisis, typical prices were 10-20 basis points, meaning that it would cost $10,000-20,000 dollars to insure $10 million of debt.

With CDS prices for Illinois debt now at 315 basis points, it means that it costs $315,000 to insure $10,000,000 of debt for five years.

The third column then translates the CDS price into a probability of default. The table shows that there's about a 1 in 4 chance that Illinois will default within 5 years. I would that this probability is highly optimistic.

Jundullah claims credit for suicide bombings in Iran

In September, I wrote about a terrorist attack on Iranian soil that was extremely humiliating to Iran. (See "Furious Iran blames Pakistan, US and Britain for Sunday's terrorist attacks.")

The attack was conducted by Jundallah, a Sunni Islamist terrorist group with links to al-Qaeda and the Taliban. The attack targeted Iran's Revolutionary Guards. It was the biggest attack on the Revolutionary Guards since the Iran/Iraq war of the 1980s, and it killed 42 people, including 20 or so top commanders in the Revolutionary Guards.

Early this year, Iran got revenge. (See "24-Feb-10 News - Iran captures Jundallah terrorist leader.") Iran used a subterfuge to capture Abdulmalek Rigi, the leader of Jundallah, and put him to death.

Now Jundullah is striking again. On Thursday evening, at least 21 people, some of them Revolutionary Guards, were killed and 100 more were injured in two suicide bombings in southeast Iran, according to the Independent.

Jundullah has claimed responsibility for the suicide bombings, as revenge for the death of Rigi, and claimed that the two suicide bombers were relatives of Rigi.

Revolutionary Guard officials are claiming that the suicide bombings were sponsored by "America, Israel and some European countries." I personally do not believe that this is likely, since Jundullah is a Sunni terrorist group linked to al-Qaeda, and we would not be supporting them while we are at war in Afghnistan.

However, what I believe IS possible is that Saudi Arabia is supporting Jundullah, as part of their overall conflict with Iran on several fronts.

Additional links

Arab countries are increasingly alarmed at the possibility of Iranian nuclear weapons, and are joining with Israel to find a way to stop them. Spiegel

After weeks of planning, Iran has decided against sending an Iranian vessel to confront Israel and attempt to break the naval blockade of Gaza. An Iranian official gave the following reason: "Israel sent a letter to the United Nations stating that the presence of Iranian vessels in the Gaza area would be viewed as an act of war and would be dealt with as such." Asia Times

Congress is considering a bill that would approve telework ("telecommuting," or working from home) for federal employees when approved by their managers. Recent changes to the bill would make ineligible for telework any employee disciplined for viewing, downloading, or exchanging pornography while performing official duties. The changes would also prevent employees from engaging in union or collective bargaining activities while teleworking. Fierce Government IT

China is increasingly gating and locking low-income neighborhoods in Beijing's suburbs overnight, in an attempt to exert greater control of migrant workers. Associated Press

Now that the United Nations has proven unwilling to criticize North Korea for the sinking of the South Korean warship Cheonan, the American and South Korean navies will go ahead with their plans for war exercises in the Yellow Sea, despite Chinese objections. VOA

Street violence in Kashmir is becoming known as the "Kashmir intifada," using the word adopted the Palestinians when they began uprisings against Israel. CS Monitor

(Comments: For reader comments, questions and discussion, see the 16-Jul-10 News -- Health care plan damages the economy thread of the Generational Dynamics forum. Comments may be posted anonymously.) (16-Jul-2010) Permanent Link
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