Guest Post: Prove The Mayans Right - Address Structural Economic Problems With Chicanery

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Submitted by Davos Sherman Okst of Financial Sense

Prove The Mayans Right: Address Structural Economic Problems With Chicanery: Part 1 of 2

Structural Economic Problem #1: Unemployment

Seventy percent of our economy is driven from private sector employment: 

  • Without consumers the economy is finished
  • Without jobs and with maxed out debt loads the consumer is finished 

A fourth grader can connect these two dots and conclude: “It’s the jobs stupid.” 

Our current chicanery “fix” for high unemployment? 

  1. Reporting the unemployment rate at 9.4% - not the actual 23% - as if reporting 9.4% will put the other 13.6% back to work.
  2. Dump money out there in a “willy-nilly” manner and call it “Stimulus” or “Job Creation Money.” 

Given
our entire situation, which I’ll address in a second, I don’t believe
that “Stimulus” will stimulate job creation or the economy. If they had
taken Chris Martenson’s
idea of insulating homes I might think differently about this. I say
this for two reasons: first, 1 in 6 jobs were housing related—that is
the sector that needs the most help. Second, global oil demand has
recently out paced global oil production. A plan that would reduce oil
demand and global oil stress should be the focus of any stimulus. Oil is
an integral part of everything from fertilizer used in farming to the
energy that our economy needs to produce and transport the goods and
services we rely on.

That
being said our economic engineers have come up with and implemented
ideas that  would make even the most ardent objector of workplace drug
screening reconsider his or her view. Case in point #1:
National
Institutes of Health (NIH) spent $823,200.00 of economic stimulus funds
in 2009 on a study by a UCLA research team to teach uncircumcised
African men how to wash their genitals after having sex.
The good news is that didn’t increase oil demand. The bad news is it didn’t do anything to create jobs here. 

Case in point #2: It takes 121,600 gallons of oil to pave 1 mile of road. Last year Government Motors sold more cars in China than in the US. China bought 13.7 million passenger vehicles FY2010, up 33% from FY2009.
The bottom line is our highway stimulus will do nothing but drive oil
prices higher. China is rushing to get their highway system built to
accommodate their new drivers.

While
I respect the idea that confidence and psychology affect consumerism,
the reality is that a 23% unemployment figure is a depressionary red
flag.  This tells us that the “Great Recession” has neither ended, nor
was it “just” a recession. I know it is hard to dispute the National
Bureau of Economic Research (NBER) - after all they were only 9 months
late in noticing and calling the greatest economic downturn in history.

The
fact remains: We are in a depression and failing to address the
structural unemployment problems will make matters worse not better. The
first step to fixing a problem is of course admitting that we have one.
We’ve squandered valuable time and in doing so we’ve greatly
exacerbated the situation.  

Globalization was an absolute
unmitigated, disastrous failure. The only thing it did was temporally
boost stocks and allow some CEOs to make 400 times what their
wage-earners made. While the economy appeared to be doing well - it was
bubble driven credit binging - not organic spending that was fueling it.
One economic blogger who is a CPA and works as a comptroller for an Ivy
League college did what no other economist I know did - he investigated
where consumers were getting their money from. Something Starbucks
Coffee’s economist should have done. Nine billion Home Equity Line of
Credit borrowed dollars were spent on 4 dollar coffees at Starbucks. The
HELOC rush caused 900 Starbuck stores to close.  

Yet,
our Federal Reserve’s Federal Open Market Committee (Fed FOMC) minutes
from FY2005 indicate that exploiting globalization is funny stuff: “But
the common concern coming from the retailers, the rails, the shippers,
the shipbuilders, and so on, was the following:  Everyone I’ve talked to continues to try to figure out ways to exploit globalization. 
Each of them, from the IT [information technology] guys to the big box
retailers to the specialty chemical firms to the service firms, wants to
have offshore supply. One of the CEOs said, “We have a long way to go
in exploiting China.”  We’ve heard that forever.
And one of my favorites was the comment, “China, India, and Indonesia
can make Italian ceramics better than Italians can now or could 200
years ago.” [Laughter]” 

In the 1950s 28% of our
job base was from manufacturing. In 2000 it was 14% and today it is
11%. Water (wages) will slosh around until they stabilize at water
level. In other words, our wages will move down towards 2 dollars a day
and China’s will move up towards ours, they will meet somewhere in the
middle. The bottom line: This is why American workers are stuck at circa
1970s wages and have no money to consume or support our economy.

The
laugh is on the American consumer and the American economy. We’ve
exploited ourselves and our economy with “thinking” like this. Giving
African’s borrowed American tax payer dollars for genital washing after
sex, our lying about unemployment rates, and driving up oil demand (or
laughing about exploiting workers) won’t fix serious structural economic
problems - it'll make it a lot worse.

Structural Economic Problem #2: Absolutely Unmanageable Debt 

Watching
the House Budget Committee hearing was a surreal mix of fact and
fantasy, but mostly fantasy. The fact was that our biggest problem, on a
consumer, local, state, federal and global problem is debt.

When
businesses or individuals get in over their heads with unserviceable
debt levels they make cuts and they borrow. When that fails and they are
left taking in and borrowing less than their obligations - they declare
bankruptcy, reorganize and move on.

The two options I heard during the hearings?

  1. Default.
  2. Raise the debt ceiling and counterfeit, (print more money). Basically: Debt is the problem so lets add more debt?!?!

What
I didn’t hear mentioned was even more troubling. There are a million
“millions” to a trillion. But the 14 trillion dollar public debt is an
iota of our debt. Hidden off balance sheet
we have 14.6 trillion in Social Security debt, 76.4 trillion in
Medicare debt, 19.6 trillion in Prescription Drugs and about 3 trillion
in GSE debt. We make Enron look honest. All toll our debt is roughly 128
trillion. Then we can add to that the state debt and local government
debt.

Governor Christie will soon learn that cuts won’t fix too
much debt. When your debt to income ratio becomes insanely unmanageable
the only solution is to shed the debt.

Add up sales tax, phone
bill tax, building permit fees, utility taxes, automobile registration,
tolls, parking, automobile inspections, airline taxes, hotel taxes,
property taxes
and the all the rest and you will soon realize that the consumer works 8
full months for the local, state and federal governments. Paying our
fair share is great, but is it smart to leave the consumer with 3.5
months of circa 1970s wages to support the economy with?

If we
had just one dynamic person in that room during these hearings we’d have
heard another option: Restructure. Our currency needs to be re-valued,
they need to issue one new dollar which is worth many, many, many old
dollars. Back it loosely and temprarily to gold to ensure faith in the
new dollar. 

Clearly our problem is debt and there is only one historically way to fix too much debt and that is to restructure.

Don’t
get me wrong, “printing”, “counterfeiting”, “monetizing the 1.5
trillion (and rising) of debt our government doesn’t have each year
through tax income and borrowing” and “Quantitative Easing” are all
one-in-the-same. We are restructuring our debt by re-valuing our
currency subvertly, Bernanke et al have just decided to do it “a la
Hiroshima style” which will be excruciatingly painful to 99% of all
Americans, it will undoubtedly put democracy in harms way and without a
backing/anchor to something the new currency will be shunned by the rest
of the world. This is not good for a country who doesn't run a trade
surplus. 

I’ve read just about everything Greenspan has written
and said over the years and one of the handful of things he got right
was this: “A democratic society requires a stable and effectively
functioning economy. I trust that we and our successors at the Federal
Reserve will be important contributors to that end.” ~Alan Greenspan

I’m not certain which end he is referring to. The United States is about 234 years old and half of the money supply has been created in this decade. Largely (read: almost entirely) because of what the then Fed Chairman
did with interest rates - and the muzzling of Brooksly Born who had the
audacious idea of putting measures in place to prevent derivatives from
ever becoming a household word.

Which brings us to the next structural economic problem.

Structural Economic Problem #3: The Value of Money & Inflation

The
irony here is one of the better explanations of what money is and how
inflation works was done by Greenspan in the 1960s when he published a
piece that was printed in Ayn Rand’s Capitalism.

He explains what money is:

  • A commodity
    that serves as a medium of exchange. (We all know what happens to the
    value of a commodity when it is too plentiful - its value decreases
    greatly)
  • Money is a store of value
  • A means of savings
  • His
    definition, since written in the 1960s before Nixon slammed the gold
    window and took us off the quasi-gold standard should be parsed with
    that in mind
  • That limited gold reserves prevented disasters by limiting the over-creation of credit/money
  • The recessions were short-lived since the money supply didn’t get out of hand

And then it gets good. Greenspan explains what caused the first Great Depression of our time (too much money):

  • “But the process of cure was misdiagnosed as the disease:
    if shortage of bank reserves was causing a business decline - argued
    economic interventionists - why not find a way of supplying increased
    reserves to the banks so they never need be short! If banks can continue
    to loan money indefinitely - it was claimed - there need never be any
    slumps in business. And so the Federal Reserve System was organized in
    1913.”
  • “When business in the United States
    underwent a mild contraction in 1927, the Federal Reserve created more
    paper reserves in the hope of forestalling any possible bank reserve
    shortage.”
  • “The excess credit which the
    Fed pumped into the economy spilled over into the stock
    market-triggering a fantastic speculative boom.
    Belatedly,
    Federal Reserve officials attempted to sop up the excess reserves and
    finally succeeded in braking the boom. But it was too late: by 1929 the
    speculative imbalances had become so overwhelming that the attempt
    precipitated a sharp retrenching and a consequent demoralizing of
    business confidence. As a result, the American economy collapsed.”

Sound familiar?

This
is, in a sick sort of way, hysterical, for it was he who created a
fantastic speculative tech and housing boom through the creation of too
much cheap money pumped into the economy and through the dismantling of
Glass-Steagall Act, and the muzzling of the watchdog who wanted to
protect us the American public from the derivatives fallout.

He then goes onto define what a welfare state is: 

  • “...the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state).”

And how the welfare state steals from its productive hard working citizens:

  • “Stripped
    of its academic jargon, the welfare state is nothing more than a
    mechanism by which governments confiscate the wealth of the productive
    members of a society to support a wide variety of welfare schemes.”
  • “A substantial part of the confiscation is effected by taxation.”
  • “But
    the welfare statists were quick to recognize that if they wished to
    retain political power, the amount of taxation had to be limited and
    they had to resort to programs of massive deficit spending, i.e., they
    had to borrow money, by issuing government bonds, to finance welfare
    expenditures on a large scale.”

Somewhere between 1966 and his term from 1987 to mid 2006 the train left the tracks and kept going.  

Thank
you Alan for forgetting history and decency. At least know I know to
which end you were referring to in your December 5, 2005 speech above.

Without
a doubt, with the monetization we have now, we will see hyperinflation
as the value of our dollar goes from the current .04 cents to 0.

The
Fed in the 1970s, thanks to the Nixon Administration was able to strip
out fuel and food from its “Core Inflation" number, something consumers
and businesses can’t do. During Clinton’s term Michael Boskin helped
tweak inflation by using Hedonics (Greek for feels good), weighting and
substitution. 

Core inflation and Enron accounting is how they
plan on solving inflation. Just remember what the Maestro of Disaster
said: The law of supply and demand is not to be conned. As the supply of
money (of claims) increases relative to the supply of tangible assets
in the economy, prices must eventually rise. 

Rise will be the understatement of the century.

Many
people wrongly argue that the money is sitting, that there is no
velocity, or that the Fed can do the Paul Volcker and raise rates. Which
brings us to our next topic, monetizing debt through “Quantitative
Easing.” (Please See Part 2).