The truth about government deficits

The truth about government deficits
NEIL REYNOLDS

Globe and Mail Update

March 12, 2008 at 6:00 AM EDT
In his 2004 book, The Price of Loyalty, former Wall Street Journal writer Ron Suskind described the rise and fall of Treasury Secretary Paul O'Neill in the first two years of President

George W. Bush's turbulent first term. Mr. O'Neill advised tax increases to avert deficits. (He calculated that a 60-per-cent increase in personal income taxes was needed.) His opposition to deficit spending made him a misfit in Mr. Bush's tax-cutting administration.

In one cabinet confrontation in 2002, Vice-President Dick Cheney lectured him bluntly. “Reagan proved,” he said, “that deficits don't matter.” Weeks later, Mr. Cheney fired him.
Set beside President Ronald Reagan's peacetime deficits in the 1980s, Mr. Bush's seven successive wartime deficits (beginning in fiscal 2002) look modest. Mr. Reagan ran deficits almost twice as large – relative to gross domestic product – as Mr. Bush.

The eight Reagan deficits averaged 4 per cent of GDP; the seven Bush deficits (thus far) have averaged 2.4 per cent.

Mr. Bush would need now to run a one-year deficit of $1-trillion (U.S.) to match Mr. Reagan's largest deficit in 1983, which hit 6 per cent of GDP (when GDP stood at $3.4-trillion). The largest of the Bush deficits – $412-billion in 2004 – hit 3.6 per cent of GDP (when GDP stood at $11.5-trillion).

At 6 per cent of GDP, incidentally, the largest of the Reagan deficits exceeded the largest of Franklin Delano Roosevelt's deficits during the Great Depression, which reached pinnacles of 5.9 per cent of GDP in 1934 and 5.8 per cent of GDP in 1936.

How destructive are government deficits? How wicked?
We can compare three recent two-term administrations, two of which (those of Republicans Reagan and Bush) became notorious for budgetary deficits, one of which (Democratic President Bill Clinton) became celebrated for budgetary surpluses. When Mr. Reagan took office in January, 1981, GDP stood at $3-trillion. When he left office in January, 1989, GDP stood at $5-trillion – an increase in these eight years of 65 per cent.

When Mr. Clinton assumed office in January, 1993, GDP stood at $6.5-trillion. When he left office in January, 2001, it stood at $9.7-trillion – an increase in these eight years of 50 per cent. (In his first term, Mr. Clinton ran four deficits, which averaged 2.6 per cent of GDP, slightly higher than Mr. Bush's deficits a decade later. In his second term, Mr. Clinton ran three surpluses, which averaged 1.2 per cent of GDP.)

When Mr. Bush became president in January, 2001, GDP stood at $9.7-trillion. When he leaves office in January, 2009, it will stand (as officially projected) at $15-trillion – an increase in these eight years of 54 per cent.

You can conclude from these numbers, rightly or wrongly, that Mr. Cheney was essentially correct, that deficits don't matter – provided you generate such vigorous economic growth that GDP grows at a faster rate. The deficits of the Reagan years were the largest in these three presidencies; the economic growth was the greatest.

The crucial lesson from the Reagan era, though, arises not so much from the deficits as from the tax cuts. Without lower tax rates, the Reagan deficits would have been merely archaic exercises in Keynesian tax-and-spend. By cutting tax rates the most, Mr. Reagan produced the most economic growth.

The U.S. Tax Foundation, by the way, has calculated that the greatest of the postwar tax-cutters was actually Democratic President John F. Kennedy, whose tax cuts represented 8.8 per cent of the 1962 budget. Mr. Reagan's tax cuts represented 5.5 per cent of the 1983 budget. Mr. Bush's tax cuts represented 3.8 per cent of the 2003 budget. Using a different measure, the Kennedy tax cuts represented 1.9 per cent of national income; the Reagan tax cuts represented 1.4 per cent; the Bush tax cuts represented 1 per cent.

Canadians can look at these deficits from a different perspective. In this space last week, we examined (and admired) the federal government's resolve in paying down the national debt. We noted that Canada now has the lowest debt (relative to GDP) of any of the Group of Seven countries. One reader responded with the observation that Canada also has the lowest per-capita GDP of the G7 countries.

This is not correct, of course. Measured on the basis of purchasing power and expressed in 2007 U.S. dollars, the deficit-spending United States has the highest GDP per capita in the G7: $46,000. But debt-paying Canada has the second highest: $38,200.
The only unequivocal conclusion from all of this is that Mr. Cheney was right to fire Mr. O'Neill. A 60-per-cent increase in personal income taxes would have shut down the U.S. economy – and the Canadian economy along with it.

You can take the high road. You can take the low road. Either way, though, you have to keep the toll as low as you can.

Pump & Dump Scheme vs Short & Distort Scheme

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Pump & Dump Scheme vs Short & Distort Scheme

This interesting article uses stages to help explain not only the stages of the highly publicized PUMP & DUMP scheme but also the stages of the lesser known SHORT & DISTORT scheme.

PUMP & DUMP vs SHORT & DISTORT

Most traders have heard and read of the Pump & Dump scheme. But very little has been written about the other side of the trade or its opposite, which is the Short & Distort.

Now lets take the Short & Distort scheme and apply it to the rules of Pump & Dump for stock manipulators.

In order to make these market manipulations work, the professionals assume:

(a) The Public is STUPID and
(b) The Public will mainly buy at the HIGH and
(c) The Public will sell at the LOW.

Therefore, as long as the market manipulator can run crowd control, he can be successful in his agenda of stock manipulation by controlling the market's greed and fear.

The Pump & Dump Scheme

Stage 1: The Acquisition of shares.

Please note: all sharp price movements, whether up or down, are the result of one or more, usually a group, professionals manipulating the share price.

(Loading): In stage I of a Pump & Dump scheme Manipulators after acquiring their shares leak information and pump the stock to get buyers silently. This leads to front loading also.

Stage 2: The Promotional Campaign!

Note: this is designed to spread a rumor/story and to play on the emotional greed of a pie in the sky find. It begins to spread across the financial world. Joe public rushes in not to miss the next gold rush.

(PUMP/Greed) Newsletter writers are hired -- either secretly or not -- to cheerlead a stock. PR firms are hired and let loose upon an unsuspecting public. Contracts to appear on radio talk shows are signed and implemented. An advertising campaign is rolled out (television ads, newspaper ads, card deck mailings, e-mails, etc.).

The company signs up to exhibit at "investment conferences" and "shows" (mainly so they can get a little "podium time" to hype their stock and tell you how "their company is really different" and "not a stock promotion.") Funny little "hype" messages are posted on Internet newsgroups. BTW the more, the merrier. 1000% returns are projected.

Stage 3: The infamous DUMP!

(DUMP) The once low volume that caused a bit of a spike suddenly changes to big volume. The stock manipulators sell out their positions into the new buying brought on by the promotion campaign.

Stage 4: The Silence or News Vacuum!

(Silence) No more news or insider leaks of information to pump the stock to get buyers. The front loading sells out. The silence plays on the emotional fear of being hoodwinked. Negative opinions begin to spread across the financial world. Joe public sells out to cut their losses. The really slick market manipulators would even seed the Internet news groups or other journalists to plant negative stories about that company. Or start a propaganda campaign of negative rumors on all available communication vessels.

Stage 5: The Distortion!

(Gone/Waiting/Shorting):

Stage 6: The Accumulation!

(Gone/Waiting/Buying): If the manipulator sees an opportunity the stock is on the floor and not part of the Short & Distort campaign they will begin buying back and slowly accumulating. As the Shorters were shorting the first manipulator was selling, so now it goes the other way. Buying to put pressure on the shorter to cover. Accumulation by new investors and averaging down of old investors leads to the pressure on the shorts.

The Short & Distort Scheme

Stage I: Monitoring

In stage I of a Short & Distort scheme Short groups Monitor spikes in volumes on stocks with no rumors.

Stage 2: Flagging

Shorts Flag stocks that run up then sits back and wait patiently for their time.

Stage 3: Preparation

The Shorters research the company and develop their Distortion of the rumors to be used later.

Stage 4: Actual Shorting

The shorts step in selling on every possible up tick. This is the Reverse of front loading. Preparations are made to attack the guy who had earlier written positively about the company and take out, discredit, any new long-term champions or messengers.

Stage 5: Distortion Campaign

The shorts step in and increase selling on every possible up tick. Just as with the pump, newsletters, e-mail, PR firms against P & D, etc. are simulated. Expertise in the field is recruited for credibility. Any possible twist using POS (Purposely Omitted Syntax) and PAS (Purposely Added Syntax) is conveniently used on every possible angle. If the POS/PAS is discovered then attack the messenger. Above all control the message boards.

The group clutters the message boards, so no positive information can be readily found. Justification is the Value of the Company in the market. Projections of $0.00 worth and loss projections of 100%

Note: The market manipulator will do everything in his/her power to keep buyers OUT OF THE STOCK. Cut your losses is touted to stimulate fear. You bought higher but now they need you to sell lower.

Stage 6: Pressure

The shorts have taken it too far. The volume is increasing and the price is not effectively dropping. A stalemate occurs. Personal attacks increase. Threats of legal action, SEC involvement, and yes even death threats increase. Increased secret IDs are employed to increase the cluttering, personal attacks and the distortion. So begins a string of lies that run for as long as one's stomach can take it. Desperately playing on the "you have been had" scenario. Any new news will be hit it hard by shorters to kill any interest.

Note: Watch the volume not the share price. A market manipulator will have various brokers buying and selling the stock to give the APPEARANCE of increasing volume but the price goes down. Thus stimulating the story the company is selling or an off shore reg S or other convenient scenario. Watch for large blocks that show up but have a MM special code, cross overs, etc.

Stage 7: The Cover

Without warning the buying pressure is too much and the short begins to cover. Short covering combined with new investors buying into the stock causes the stock to go up. Often the whole thing starts again. Just a vicious cycle sometimes.