The Reaction to Hurricane Katrina: Why Has Gold Been Soaring Recently?

Mike Shedlock discusses The Reaction to Hurricane Katrina . . . and explains how this relates to why gold has been soaring recently.

Let’s take a look at the long version.

On Friday, Sept. 16, Reuters reported, “Bush Rules out Tax Hikes to Pay for Katrina”:

“President George W. Bush, facing alarm from conservatives over the soaring cost of post-Katrina rebuilding, said on Friday the U.S. budget could handle the expense and he would not raise taxes to pay for it.

“‘It’s going to cost whatever it costs,’ Bush said at a joint news conference with Russian President Vladimir Putin as estimates circulated in Washington the cost could hit $200 billion, exceeding the cost of the Iraq war.

“‘But I’m confident we can handle it, and I’m confident we can handle our other priorities. It’s going to mean that we’re going to have to cut unnecessary spending,’ Bush said.”

The president made clear raising taxes was not an option to help cover the costs:

“‘We got to maintain economic growth, and therefore, we should not raise taxes,’ Bush said, noting Americans were already paying ‘a tax in essence’ because of higher gas prices. ‘And we don’t need to be taking more money out of their pocket.'”

I do not know about you, but isn’t “It’s going to cost whatever it costs” just a little too nonchalant for something that might cost up to $200 billion? Given that we are still wasting money like mad in Iraq, I doubt it catches the waste over there; but then again, underestimating the stupidity of the government is seldom a wise thing to do.

As for, “It’s going to mean that we’re going to have to cut unnecessary spending,” gee, don’t we have a Republican Congress and a Republican president? Given that is the case, why is it we have “unnecessary spending” in the first place? Could that be because Bush has signed every appropriations bill ever sent to him? Where is this party of reduced government spending, smaller government proponents, etc.? Perhaps the simple explanation is that for all practical purposes, we do not have either a Republican Congress or a Republican president.

The only person being honest was White House economic adviser Allan Hubbard who offered this comment: “There’s no question that the recovery will be paid for by the federal taxpayer and it will add to the deficit.”

“House Majority Leader Tom DeLay said yesterday that Republicans have done so well in cutting spending that he declared an ‘ongoing victory,’ and said there is simply no fat left to cut in the federal budget.

At this point Mish has two questions:
1. Mr. President, is Tom DeLay off his ever-loving rocker, or are you?
2. Mr. DeLay, is President Bush off his ever-loving rocker, or are you?
Clearly one of you is clueless. Who is it?

Given that the budget deficit before Katrina was over $330 billion, and given that President Bush has yet to veto an appropriations bill (or any bill for that matter), I vote that both Bush and DeLay are clueless.

The Washington Times continues…

“‘This is hardly a well-oiled machine,’ said Rep. Jeff Flake, Arizona Republican. ‘There’s a lot of fat to trim…. I wonder if we’ve been serving in the same Congress.’

“American Conservative Union Chairman David A. Keene said federal spending already was ‘spiraling out of control’ before Katrina, and conservatives are ‘increasingly losing faith in the president and the Republican leadership in Congress.’

“‘Excluding military and homeland security, American taxpayers have witnessed the largest spending increase under any preceding president and Congress since the Great Depression,’ he said.”

The Reaction to Hurricane Katrina: “The Era of Big Government Is Back”

“The era of big government is back. President Bush is presiding over what is sure to be the most expensive government relief and reconstruction operation in U.S. history.

“With estimates of the federal tab ranging up to $200 billion for rebuilding New Orleans and other storm-ravaged Gulf Coast cities, Bush and his Republican allies in Congress are casting aside budget discipline….

“Hurricane Katrina also opened the floodgates to proposals in Congress building on a host of long-cherished Republican themes. These include proposals for school vouchers for storm-displaced children, more federal support for ‘faith-based’ organizations engaged in hurricane relief, as well as business-friendly ‘enterprise zone’ tax credits for enterprises that rebuild in stricken areas, and eased environmental and labor-protection requirements….

“‘The fact of the matter is when our nation faces these type of emergencies, it unfortunately requires us to deficit spend. It’s nothing that anybody in Washington, or anywhere for that matter, likes to do, but it’s necessary,’ White House counselor Dan Bartlett said ahead of Bush’s Thursday night speech to the nation.

“Some fiscal conservatives are expressing alarm.

“‘It is inexcusable for the White House and Congress to not even make the effort to find at least some offsets to this new spending,’ said Sen. Tom Coburn (R-Okla.). ‘No one in America believes the federal government is operating at peak efficiency and can’t tighten its belt.’

“Government failures at the federal, state, and local levels are being widely blamed for the anarchy and loss of life in the early days after Katrina slammed into the Gulf Coast on Aug. 29.

Mish apologizes for having more questions, but here they are:

1. Given that the era of big government is back, just when did it go away?
2. Why should “faith-based” organizations get any federal money?
3. Why does it take a disaster to tighten one’s belt?
4. Why not tighten ahead of time, so money is there in case of a disaster?
5. Government has proven without a doubt that it is the problem, not the answer, so why is there clamoring for more government now?

The AP continues:

“Sen. Edward M. Kennedy (D-Mass.) proposed that Congress create a Gulf Coast Redevelopment Authority, modeled after the Tennessee Valley Authority, to oversee the reconstruction. TVA, created during the Depression as an independent federal agency, is widely credited with the revitalization of the seven-state Tennessee Valley region.

Obviously, there is nothing like a disaster to get idiots chirping on both sides of the aisle. These people want to help. At least I think they do. But barring an unexpected and extremely unlikely mass rush of congressional sanity, the best thing they can do is nothing.

“House Speaker Dennis Hastert, the Illinois Republican, says that Congress is seriously considering a federal bailout of municipal bondholders affected by the vicious storm. Many cities and authorities that were in the path of Katrina may be unable to meet interest payments come Oct. 1, because they can’t collect the taxes needed to meet these obligations. The federal government is mulling some kind of guarantee, valid through the end of 2006, that would keep the issuers from defaulting….

“The bailout idea appears to have originated with the National Association of Bond Lawyers in its Sept. 7 letter to both the Department of the Treasury and the Internal Revenue Service (Re: Hurricane Katrina Relief and Rebuilding-Municipal Market Needs)….

“Bond lawyers quickly found allies in Louisiana Republican Rep. Jim McCrery [R-La.] and Mississippi Republican Sen. Trent Lott. McCrery says bondholders never anticipated Katrina and should get federal help.

“[Fixed-income expert David] Kotok has some problems with McCrery’s logic. If Congress were to follow through, then it might create an implied federal guarantee for bonds issued by other high-risk communities, he says.

Nothing like a bunch of bond lawyers asking for a federal bailout because their clients underestimated the risks of a bunch of municipal bonds, is there? No doubt such a relief package will be stated to benefit Aunt Martha, who has just one muni in her portfolio, while the real beneficiary is some large bank holding thousands of those municipal bonds.

The worst problem is the moral hazard this would create for all municipal bonds. If the government is going to bail out every disaster and every bankruptcy, then bonds have no implied risk, and everyone will be jumping into them.

NO! The very best thing Congress can do on this issue is nothing. Don’t get your hopes up. When it comes to spending and big government, this Congress and president have no bounds.

“Hurricane Katrina will hurt the U.S. economy in the short run, but bright long-term prospects mean the Bush administration can push ahead with its reform agenda, a top White House economic adviser said on Thursday.

“‘In the shorter term, the devastation wrought by Hurricane Katrina will have a palpable effect on the national economy,’ White House economic adviser Ben Bernanke said in prepared remarks for delivery at the National Press Club. But he said private-sector forecasts were for healthy long-run growth.

“Bernanke said the White House intends to continue pursuing policies that make the economy able to withstand shocks and that will keep growth on track.

Yep, nothing can stimulate gold more than cutting taxes while dramatically increasing spending. Those holding major positions in gold thank you, Mr. Bernanke, President Bush, and Congress, for a nice 1-2-3 punch.

If none of that has scared you into gold yet, perhaps this will. In a nationally televised address, President George W. Bush said, “As long as I sit in this chair, all future catastrophes will be planned by me.”

Regards,
Mike “Mish” Shedlock
September 22, 2005

Strategic Insider – 22 September 2005 – William Rees-Mogg

On August 22nd, which seems a long time ago in terms of European or, indeed, American politics, I wrote that the German election would decide whether Germany was to accept reform or not. “If Angela Merkel, the Christian Democratic Union leader becomes Chancellor, she will have won as a free market reformer. If she loses, Germany will have repudiated radical reform.”

We still do not know whether Frau Merkel is going to become Chancellor or not, but we do know that she did not win the election. The combined vote of her proposed coalition parties, the C.D.U. – C.S.U. and the F.A.P., only came to 45 per cent, falling well short of an overall majority.

The S.D.P. leader, Gerhard Schröder, started his election campaign as a reformer, and ended up by campaigning against reform. That is fairly normal conduct for Chancellor Schröder. The first time I heard him speak was in London; he denounced the project of establishing the Euro. At that time the German popular opinion wanted to keep the DMark, and one cannot blame them.

The next time I heard him speak, again in London but about a year later, he made a powerful speech in favour of the Euro, and indeed he was the Chancellor by the time that the DMark was actually abolished. Yet he is a skilful populist. He can judge the mood of the German electorate. In 2002, he was right to judge that German voters would be unsympathetic to U.S. policy in Iraq. In 2005, he was right to think that they would not be keen on the economic sacrifices that Angela Merkel called for.

Those included a steep rise in Value Added Tax. Schröder let his opponent get onto the unpopular ground of higher taxation, and destroyed her lead in the polls. She also suffered from proposing a flat tax, which he was able to misrepresent as inherently unfair.

This German election result is bad news for Europe. Germany has high unemployment, around 10 per cent, a high budget deficit, rising debt and low growth, about one per cent. The European Union is a low growth area, not competitive with Japan and China, and not competitive with the United States. Germany is the industrial engine which is supposed to pull Europe forward, the locomotive. Yet German employment law has given German workers privileges which have made them uneconomic. As a result German employers have been sending jobs abroad, to Asia and to lower cost European counties.

The German electorate produced an almost perfect balance between centre right and centre left in the new Bundestag. Against the centre right’s share of 45 per cent, the centre left won 43 per cent of the vote. Oskar Lafontaine’s Left Party, a combination of ex-communists and S.P.D. rebels, won 8 per cent, but no-one is willing to go into coalition with them. The result is a stalemate, not just for Germany but for the European Union as a whole.

Tony Blair had hoped that he would be able to use his six months as President of Europe to introduce new reforms, with the aid of the new German Government. There will not now be a new German Government, of any effective kind. As a result there will be no new reform. Like everyone else, Tony Blair is in stalemate.

Regards,
William Rees-Mogg