The Great Anxiety

The Great Recession has morphed into the Great Anxiety.  Economic growth is tepid, enough so that it inspires little confidence.  Unemployment, still high, is falling, but so slowly that consumers' animal spirits remain tame.  Individual investors, confronted by three year highs in the stock market, celebrate by fleeing.  The members of Congress devote their energies to calling each other finks, rat finks, double rat finks, and triple rat finks, while the nation veers toward a fiscal vortex.  Both candidates for the Presidency, although individually quite intelligent and accomplished, swap lies about how the other is lying and inspire little more than resigned sighs from their supporters.  The Federal Reserve is operating the only show in town, and its program consists of printing money, printing money while riding a bicycle sitting backwards, printing money while juggling eight balls and printing money while doing double somersaults on a trapeze.  But the Fed can't do much to resolve the problems in Europe, which is now sliding into recession even as the sovereign debt crisis gets kicked farther down the road.

If the Federal Reserve Board is correct in believing that public confidence is crucial to economic growth, then we are a long way from healthy, sustainable growth.  By all current indications, whichever candidate for President wins won't inspire much confidence.  Congress appears likely to remain divided between a Republican House and a Democratic Senate.  Gridlock isn't that big a problem when the economy is strong.  But it is deadly when the economy is moribund.  For better or for worse, a somnolent economy needs a decisive government, and we probably won't have one. Can kicking isn't a sound federal economic policy.  Both Japan, and more recently, the European Union, have vigorously kicked the can numerous times.  The problem, though, is that business people and consumers all know that the can is still there, and can bite them in the butt big time.  So they don't make big commitments; they don't go exuberant.  Can kicking virtually guarantees stagnation.  Yet can kicking has been the order of the day in Washington.

In a time when lukewarm coffee is all that you can hope for, invest cautiously.  It's not a bad idea to hold some risk assets.  But limit your exposure, and avoid the riskiest.  Hold a good dollop of stable assets, and don't stretch for yield.  One important way to give your net worth a boost is to save more.  Remember that the thriftiest squirrels have the best chance of surviving winter--and the coming winter could be cold indeed.

Manufacturing Matters

In the end, Steve Jobs got his revenge.  Once marginalized by Microsoft and its monopoly on PC operating systems, and then kicked out of Apple, the company he founded, Jobs was recalled to Apple as it was sliding into a death spiral.  He proceeded to rebuild his brain child into the most successful business corporation today.  Apple is the leader of its market segment--that segment being the mobile world.  It manufactures visually attractive and highly efficacious mobile devices.  Okay, they had a problem with maps.  But Apple has overcome its previous belly flops, and it will surely overcome this one.  Its high prices may keep it out of the reach of some consumers.  But those that can afford its products tend to be the well-off who are highly sought by advertisers.

By contrast, Google and Facebook are now looking at the abyss.  They haven't figured out mobile, at a time when mobile products are the fastest growing consumer high tech segment.  Both Google and Facebook rely heavily on advertising, but mobile screens are too small for the kinds of ads that have proven successful on PCs and traditional laptops.  There isn't yet a mobile-specific advertising strategy that really works.  As the world becomes more mobile, Google and Facebook face the potential for a Yahoo-style decline, unless they solve the advertising problem or find alternative revenue sources.  Solving the advertising problem requires gathering more and more detailed information about individuals using their products.  But that could bring them into greater conflict with governmental protections for privacy.  This is a particular issue in Europe, and a growing issue in America.  These privacy protections will ultimately limit the extent to which Google and Facebook can facilitate the targeting of ads.  One interesting notion is perhaps Yahoo, with its banner ad business (which doesn't rely on detailed personal information), will eventually prove the tortoise in its race against Google and Facebook.

In part, Google and Facebook confront the problem of all successful high tech companies.  No matter how well you're doing, the next big thing is coming and you'd better be prepared for it or others will out-innovate you and leave you in the dust.  IBM didn't anticipate the PC, and it lost its standing as the predominant computer company.  Microsoft didn't anticipate the ubiquity and importance of the Internet, and it's in a slow fade.  RIM didn't anticipate how consumers would flock to the smart phone, and it's barely staying alive on its corporate customer base.

But failure to anticipate the next big thing isn't the only dynamic.  Part of the dynamic is that Apple manufactured the next big thing.  By creating products that elevated the mobile experience by quantum leaps, Apple made consumers want mobile products.  By manufacturing and selling these products, Apple derives a very large part of its revenues from selling hardware and software packaged together.  It doesn't give consumers stuff for free and hope that it can slip in a few ads here and there.  It makes and sells stuff for cash money.

Making and selling stuff has, for millenia, been the heart of economic activity.  The evolution of the industrialized world revolved around elevating the manufacturing process to a grand scale, so that vast quantities of stuff could be made efficiently and sold at prices a lot of people could afford.  Steve Jobs' relentless commitment to manufacturing--and thus control over product design and quality--placed Apple at the core of the industrial process.  By manufacturing high quality and innovative stuff, Apple avoided the commoditization of PCs (which bedeviled Dell, Hewlett Packard and other companies) and elevated itself to the top of the high tech world. 

This isn't a sales pitch for you to run out and invest in Apple.  Its stock, on a tear earlier this year, has been falling back recently.  Its maps debacle hurt, and its future--always uncertain because it's in the most volatile of industries, high tech--has been made more unpredictable by the death of Steve Jobs.  The point here is that Apple's business strategy of manufacturing made it strong, and is a sound idea for American economic policy.  America increasingly doesn't manufacture.  But you can't build a strong national economy on management consulting, investment banking, hedge funds, law practice, health care, restaurants, and services like hair salons, pet walking, personal shopping, and the secondary and tertiary retailing in websites like eBay.  The foundation of a strong economy is manufacturing.  Look at Germany.  Look at China.  America was once the manufacturing giant of the industrialized world.  While it can't return to that status, it can look for ways to encourage manufacturing.  We all know Apple manufactures a lot of components in China.  But well under half of its revenue dollars are spent in China.  Much more is allocated to spending in America, for things like retailing, distribution, employee payroll and so on.  Successful manufacturing companies make their home countries strong. 

Most of the debate today over fiscal policy revolves around the amounts of federal spending and federal taxation.  But fiscal policy isn't just a matter of accounting.  The nation benefits by spending and taxing wisely.  Keeping Social Security, Medicare and Medicaid in the black will be easier if we have a robust manufacturing sector.  The pie is much easier to divide if it's bigger.

Pan Europeanism's Gambit

It would appear that a group of key European leaders combating the EU financial crisis have coalesced around the banner of Pan Europeanism.  Mario Draghi, head of the European Central Bank, has positioned the ECB to start financing struggling EU governments.  This is a paradigm shift from past ECB policies, and moves the ECB toward the money printing mode of the Federal Reserve and the Bank of England.  Recently, Angela Merkel, Germany's Chancellor, has spoken of cutting Greece a break on its austerity obligations under the terms of the EU's bailout for that nation. Such magnanimity is at rather sharp odds with her tough stated positions not many months ago.  The recent election in France of Socialist Francois Hollande shifted the EU's political center of gravity toward more accommodative measures--Hollande's notion of austerity is to raise taxes on the wealthy and give them a taste of austerity. 

The award of the Nobel Peace Prize to the European Union may be the latest move in the gambit to persuade skeptical northern European taxpayers of the need to keep the EU together.  The point is that failure to stay together will raise the specter of another continental war.  Although actual war seems highly unlikely in today's non- and often anti-militaristic Europe, the subliminal message is clear. 

The Nobel award is like a mutual admiration society of Pan Europeanists high fiving each other. The political in-crowd on the continent has to be very pleased with itself at the moment.  But the baseline problem for saving the EU remains whether or not northern European taxpayers are prepared to foot the bill for keeping the whole shebang together.  If not, the $1.5 million or so that comes with a Nobel Prize won't matter.  An interesting question is who will the EU select as its representative to receive the award.  Here's betting it's Angela Merkel, who needs political cover.

How Government Adds Risk to Risk Assets

The Federal Reserve has been on a tear, squashing interest rates in order to coerce investors into risk assets.  But investors, especially individual investors, have been zigging where the Fed wants them to zag.  They have succumbed to post traumatic stock disorder, and abandoned equities with abandon. 

Fear of stocks isn't just a product of the market busts of recent years.  It's also driven by too many known unknowns.  The role of government in pumping up asset prices has become so great that it receives more attention from financial news services than economic fundamentals.  But, as mandated by the law of unintended consequences, government actions have made risk assets less attractive.  Here's how.

The Fed has become less predictable.  In years past, the Federal Reserve was slow to reveal its thinking and the reasons for its policy actions.  Chairman Ben Bernanke has endeavored to be more transparent.  And he has been more transparent about the workings of the Open Market Committee and its thinking.  But what has been revealed only confounds.  The Fed is quite open about its intention to provide monetary stimulus in order to boost employment.  But no one knows what level of employment will cause the Fed to ease back, or what rate of inflation will lead it to move interest rates up.  No one knows what type or form of additional quantitative easing the Fed will employ if employment levels remain unsatisfactory (however unsatisfactory may be defined).  Will it buy car loans, credit card debt, bankers acceptances, commercial paper, corporate bonds, junk bonds, common stocks, or something else?  Whether or not, why, when, how, how fast, and how much are important, but unanswered, questions concerning the Fed's potential unwinding of its massive $3 trillion plus balance sheet. Any purchaser of risk assets would want answers to these questions.  But answers are unavailable.

The Fed is relentlessly driving its monetary wagon train under the motto "full employment or bust."  By acting so vigorously and creatively, however, it has created a lot of uncertainty even as it has stabilized the financial system.  There are so many uncertainties about the route the Fed is taking that individual investors don't want to hitch up their wagons and join the trek.  What the Fed will do next is anybody's guess, and because of its outsized impact on risk asset prices, this unpredictability makes risk assets riskier.

Fiscal funk.  Congress's dysfunction was on full display last year when those freakin' idiots--excuse me, the esteemed members of Congress--almost blew up America's creditworthiness in the debt ceiling debacle.  Things haven't changed.  Forecasting fiscal policy is like peering into a black hole.  It's impenetrable.  Whatever happens could make things worse.  Also, consider the permanently temporary nature of the Bush II tax cuts, which have fallen into the habit of being extended a year at a time.  The analysis of risk assets becomes labyrinthine when the tax system is established for only a year at a time. Another big, bad black hole is known as the fiscal cliff, which is huffing and puffing furiously.  Yet we don't know if we're in a house of straw, wood or brick.  All these fiscal foulups accentuate the risk in risk assets. 

Rational investors trying to reason their way to well-founded decisions haven't got a popsicle's chance in hell of figuring out the upsides and downsides of risk assets.  They just know that these known unknowns heighten the risks.  In such circumstances, digging the fox hole deeper and hunkering down all the more make sense.

Would You Invest in Government?

Investors have an unusual problem today:  should they invest in government?  No, that's not political rhetoric.  It's perhaps the biggest question facing anyone with cash to allocate.  Asset prices have been manipulated upward by central banks and other government policies.  Stocks and bonds would not be trading at today's prices had it not been for all of the merry money printing by the major central banks during the past few years.  Indeed, the Federal Reserve takes credit for over half the rise in stock prices since 1994.  See http://blogger.uncleleosden.com/2012/07/stocks-are-not-cheap.html.  If you buy stocks or bonds now, you're betting that central banks can continue this juggling act. Is that possible?  Let's look at real estate.

Real estate prices for decades received government support on a massive scale.  Beginning in the 1930s and 1940s, various government lending and finance programs (think Fannie Mae, Freddie Mac, Ginnie Mae, FHA, etc.), along with tax deductions for mortgage interest and property taxes, plus more specialized programs like federal flood insurance, have combined to create a vast support network for real estate, worth trillions of dollars.  Add Federal Reserve easy money policies starting in the 1990s going forward, and real estate prices were boosted leaps and bounds by government largess.  We know, however, how this story ends.  Humpty Dumpty had a great fall, and all the government's programs and bailouts since the financial crisis of 2007-08 haven't put Humpty together again.  To be sure, a great deal of private avarice and stupidity played central roles in the real estate catastrophe.  But the presence of the government, lending a helping hand at every turn, made it easy to believe that real estate prices would never drop. 

Stock and bond prices now seem similarly invincible.  Even though Europe is sliding into recession, China's growth is slowing, and America's economy sputters and coughs just above recession level, stocks keep bubbling up.  Any positive economic statistics add to the ecstasy.  Negative ones slip from short term memory.  Many investors skittish about stocks have no qualms about diving into bonds, even though bond values have been driven to extreme heights.  Central bankers worldwide issue virtual carbon copies of each other's press releases declaring their unswerving commitment to keep printing money until . . . well, until . . . well, it's not clear where the process will end because the printing presses are now set to run ad infinitum.

To invest today, you have to pay the government prescribed price. To assess the risks of financial assets, you have to give heavy weight to political considerations--and those ain't pretty.  Buying financial assets like stocks and bonds is essentially an act of faith--faith in governments, and especially in central banks.  But faithfulness in this respect may not get you through the Pearly Gates.

Costs of Quantitative Easing

The law of unintended consequences haunts economic policy.  The Federal Reserve's quantitative easing program, now in its third phase, is meant to provide economic stimulus.  However, it also drags on the economy.  Let us count the ways.

Reduced Interest Income.  Hundreds of billions of dollars of interest income have been lost because of the Fed's longstanding campaign to drive down borrowing costs.  Losses of this magnitude undoubtedly have dampened consumer demand.  Even though QE likely sprung loose some personal income by providing lower mortgage rates for homeowners to refinance, tight standards applied by banks making mortgage loans have limited the refi impact of lower rates.

Reduced Retirement Savings.  As bond yields shrivel up like corn in today's drought-ridden Midwest, many retirements look bleaker.  Even though the stock market has boomed, large numbers of shell-shocked savers abandoned stocks after the 2008-09 market crash and haven't participated in the gains.  Instead, they ducked into bonds.  Although the improbable bond rally of the past few years generated capital gains for many bond holders, the basic return sought by bond investors comes from interest paid.  That has been paltry.  As retirements look bleaker, many workers cut back on current consumption in order to save more.

Pension Pain.  Despite appearances from some recent press coverage, pension funds cannot take large risks, overall, with their portfolios.  However much publicity pensions' alternative investments may generate, a large part of pension assets must be invested in high quality bonds.  As returns on these puppies shrink, employers corporate and municipal confront the necessity for greater contributions.  Workers may be laid off, citizens may receive fewer public services, state and local taxes may be raised, shareholders may endure lower returns, and those workers still employed may have to make greater pension contributions.  All of which would further discourage current consumption.

Insurers Backpedal.  Insurance companies' returns on their investments are falling.  This means policies that depend on long term returns, such as annuities and long term care policies, become more expensive or even impossible to buy.  Or else, they offer fewer benefits.  Policy holders suffer.  Those people who want to provide for themselves, through long term care policies, annuities, whole life and similar products, have a harder time.  More people end up having to rely on government programs like Social Security, Medicaid and so on.  That's not good in an age of serious federal deficits.

Yield Curve Flattens Bank Incentive to Lend.  Back in the days when they made loans, banks would borrow short term (usually through demand deposits, interbank loans via the fed funds market, and savings accounts) and lend longer term.  The difference between short term interest rates (historically lower) and longer term interest rates (historically higher) provided profits for the banks.  But the yield curve (the graph of interest rates from short to long) has been flattened by the Fed's monetary policies.  There isn't that much difference any more between short and long term rates.  Potential profitability for banks has been squeezed.  Banks have less incentive to lend, and fewer loans means less potential for economic growth.

The Fed has sworn on a stack of printed money to keep short term rates darn near invisible until at least mid-2015.  It may achieve some of its objectives.  But it will also create unintended consequences.  The impact of these opposite reactions to the Fed's actions may be greater than the central bank foresees.  There are few real life experiments in economics.  But if we look at the most obvious example of the impact of a central bank squashing interest rates for years at a time, we can see that Japan has remained moribund for two decades since its financial and real estate crashes in the early 1990s.  The Bank of Japan has ruthlessly stamped out any positive upswings of interest rates in that nation.  But that hasn't produced the spark needed to revive Japan's economy.

It now looks like the Fed will keep rates unnaturally low for the better part of a decade.  Given Japan's experience, one wonders what is in the Fed's playbook.  If it's a sensible fiscal program from Congress and the White House, the next question would be what is the Fed smoking?  But if the Fed is acting on the reasonable assumption that we will have fiscal dysfunction for the foreseeable future, only the arrival of Godot, it would seem, would offer reason for optimism.

The Fed's QE3: An Old Dog Pulling An Old Trick

Since the financial crisis of 2008, the Federal Reserve has striven to show that an old dog can learn new tricks. Its grab bag of novel programs have at various times propped a variety of financial markets, ranging from commercial paper to asset backed securities to U.S. Treasury securities, as well as banks and other financial institutions. Its aggressive use of quantitative easing has in particular stood out from Fed monetary policy of yore, in which discount and fed funds rate adjustments, along with changes in bank reserve requirements, were the only flavors of monetary policy served up.

The recently announced QE3 looks innovative: it's permanent until the labor market is doing 70 in a 35mph zone, will involve $40 billion of purchases per month, and is focused on mortgage backed securities. The Treasury securities market isn't targeted (although it's still being stage managed through Operation Twist to push down yields on long maturities). But QE3 is really just an old trick performed in a different way.

Going back to the new paradigm days of Chairman Alan Greenspan, the Fed has believed that the real estate market leads recoveries. One of the Fed's major frustrations with the Great Recession has been the moribund housing market. It remains badly hung over from over-indulgence in leverage, and battered consumer balance sheets make it difficult for many wannabe buyers to qualify for loans. QE3 is a direct shot of liquidity into the housing market, made with the hope of lowering mortgage rates, stimulating buyers and boosting the economy.

But we've heard this song before. After the 2000 tech stock crash and the 9/11/01 stock market swoon, Chairman Greenspan squashed interest rates with the intention of goosing real estate in order to keep the economy growing. It worked. Already in recovery mode from a downturn in the 1990s, real estate skyrocketed in the early and mid-2000s. The economy grew. Employment levels were good. Everything was peachy.

Until the bubble burst. Since 2007, we have paid the price for the Fed's campaign ten years ago to use the housing market as a way to foster economic growth. Too much of America's wealth was invested in real estate, and the resulting losses continue to choke the economy. One would think the Fed learned a lesson--that concentrating America's capital into a single market sector is risky and when that market sector turns down (as all markets do from time to time), the losses are exacerbated by the over-concentration.

But perhaps old dogs fall back on old tricks. There is serious concern that the Fed has run low on ammo. It can't push interest rates much lower. It can't keep distorting the U.S. Treasury market and give the federal government a very low cost way to run up the deficit. And banks don't want to lend no matter what the Fed signals, because loans are risky and the banks could take losses. So the Fed has decided to directly finance the mortgage markets by purchasing $40 billion per month in the MBS market. In other words, it's going to goose the housing market in the hope of stimulating the economy.

Some people like roller coasters. Others find them nauseating. The last time we got on this roller coaster, the ride ended badly. Nevertheless, the Fed is getting on again. Short term, it may enjoy success, just as the Greenspan Fed enjoyed success--for a while. But long term, the Fed faces a dilemma. In order to prevent another real estate bubble, the Fed has to maintain prudent lending standards. But prudence won't lead to the euphoric exuberance that could launch the economy into the dramatic rise that the Fed seems to be seeking. Will the Fed use its supervisory powers over the financial system to loosen up lending standards, with the concomitant risk of a housing bubble and bust, followed by a Greater Recession? Aroma of rat drifts into the ambient environment. QE3 may not really work unless it fosters really large risks. And we know what can happen when there's a lot of risk around.

Why Doesn't the Fed Fix Facebook?

By all indications, the Federal Reserve has taken up the job of keeping the stock market happy. It's high time the Fed fixed Facebook. There may be good reasons why Facebook has lost half or more of its IPO value. But there are also good reasons why the the economy is in the doldrums. Just as the Fed has fired off numerous weapons to stimulate the economy and make the financial markets feel better, the Fed should make Facebook investors happy. They'll increase their consumer spending if their stock goes up and that will boost the economy. Everyone will be happy because QE is the source of all happiness these days.

The Fed should announce QE-Facebook: it will buy up FB shares, not at the current market price but at the original IPO price. After all, the point is to boost confidence, and bailing FB investors out of their losses is a good way to boost confidence. Nothing better than a do-over when you made a boo boo. Better yet, the Fed should buy FB shares at double--no wait, triple--no wait, quadruple the IPO price, or $152 a share. That way, investors would get the benefit of the IPO pop they were all expecting. That would really give the economy a zing.

There's no logical reason to stop with FB. The Fed could also buy Zynga and other IPO stocks at pop prices. Indeed, the Fed could simply announce QE-stocks and stand as a ready buyer in the stock markets for all stocks at whatever price investors expect however unreasonably.

Throughout this summer, the stock market has moved up as the world economy has deteriorated and the U.S. economy has slowed. This rise was all because of central bank easing and the expectation of continued central bank easing. Unlimited central bank easing is the best kind, and the ECB just served it up (kind of, see the preceding blog http://blogger.uncleleosden.com/2012/09/whats-behind-ecbs-unlimited-bond-buying.html). The days when central banks would take away the punch bowl just as the party was warming up are long gone. Now, the central banks host the parties, which always have open bars. If the Fed wants a good party, it should open up the taps and let them flow freely. QE-Facebook. QE-Zynga. QE-all stocks.

What's Behind the ECB's Unlimited Bond Buying Program?

It's kind of hard not to smell a rat in Mario Draghi's proposal for the European Central Bank to make "unlimited" purchases of sovereign bonds of troubled EU member nations. According to the proposal, the ECB will buy an EU member's bonds if the member requests assistance and submits to fiscal oversight by the EU. The latter, however, has been the problem with Greece. It doesn't want to submit to the EU's fiscal oversight. And when it did agree to terms demanded by the EU, it failed to comply with them. In return, Greece has been given break after break after break. It effectively defaulted months ago, but the EU papered the default over with a loan workout that forced creditors to sustain losses (which they may have recouped via credit default swaps, so the losses actually fell on the writers of the CDSs or their unfortunate direct, secondary or tertiary counterparties who held the ultimate risk of loss). Stated otherwise, the EU has supported Greece without Greece having to do the full austerity dance it was supposed to do.

The two countries that Draghi's proposal was aimed to help, Spain and Italy, insist that they will not submit to fiscal oversight by the EU (for domestic political reasons). If they really mean it, that means they won't get bond buying assistance from the ECB. Possibly, their hardline insistence that they won't ask for help (and thereby submit to central oversight) is a bluff, meant to get Draghi to drop the fiscal oversight condition. They could simply let market forces push their bond yields higher. That would shove the EU closer to the brink. Draghi might then drop the fiscal oversight condition when the markets threaten to go haywire. Of course, the bluff isn't really aimed at Draghi, who seems amenable enough to U.S. Fed-style money printing, but at the Germans and other northern Europeans of the frugal persuasion. The Greeks have proven themselves adept at brinksmanship with Germany and its economic allies. Spain and Italy have little incentive to be any more austere.

Germany may be wealthy enough to bail out Greece. But it can't bail out both Spain and Italy, which have much larger economies. So a move by Draghi to drop the fiscal oversight condition could lead to German withdrawal from the EU. That could be catastrophic. But writing blank checks to Greece, Spain and Italy could be catastrophic for Germany, and one can't expect Germany to knowingly sign up for a catastrophe. Mario Draghi may be playing a most dangerous game, and he'd better play it well or the abyss will beckon.

Ignore the Election. Try a Little Science.

As far as economic growth goes, forget about the Presidential election. Neither party is focused on what really matters: basic scientific research. All great surges in economic growth have resulted from scientific advancement. When humans acquired enough scientific knowledge to engage in agriculture, they were able to grow large surpluses of food. These surpluses were used to support the development of settled societies, with cities, specialized workers, the centralization of knowledge through educational institutions, and control over resources like rivers and their floods. Human populations increased exponentially, as did human wealth.

The leap from a largely agricultural world to an industrialized world began with the development of the steam engine at the end of the 18th Century. The steam engine allowed humans to harness very large quantities of power derived by burning wood, and later fossil fuels. The vast increase in power offered by the steam engine led the way to the railroad, steam ships, giant factories that provided economies of scale, and even a few early cars.

In the 19th Century, the harnessing of electricity led to the telegraph, telephone, small and large scale lights and lighting systems, and all manner of machinery and equipment. New technologies for extracting and utilizing fossil fuels like coal, oil and natural gas vastly increased the amount of power available to humans, especially through the use of the internal combustion engine that powers almost all motor vehicles today. With that great increase in power came an enormous improvement in living standards.

In the 20th Century, advances in knowledge of electromagnetic radiation gave rise to the radio, television, cell phones and the wireless computers used today (variously called smart phones, tablets, etc.). Advances in agriculture have eliminated a great deal of the hunger that plagued much of the world before World War II. Developments in material sciences led to the semiconductor revolution, which is the foundation of all modern computers. The Internet, invented by [fill in the name of your favorite politician], has revolutionized communication.

In short, the big score comes when humans make major scientific advances and find ways to exploit them. Money printing and interest rate manipulation by the Fed, supply side tax cutting, deficit spending, scorched earth treatment for Medicare and Medicaid, and just about all the other hooey that politicians can't stop talking about don't amount to jack compared to the effectiveness of scientific advance in fostering economic growth. Much and perhaps most of today's political debate revolves around how to split up a seemingly inadequate pie. But the supposed conflicts between the 1% vs. the 99%, older folks vs. younger ones, taxpayers vs. beneficiaries of the social safety net, and so on all become less consequential if the pie expands at a faster rate.

Don't expect private financing sources to support basic scientific research. Private capital wants to reap its profit within a few years, and concentrates on applied science. But applied science doesn't provide lasting prosperity (ask the Japanese, masters of applied science, about this point). Support for basic scientific research is essential to long term prosperity. If there's one item in the federal budget that should be boosted, this is it.