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Guest Post: The Way Out Of Our Economic Mess
By Terry Coxon, Casey Research
"A rock and a hard place" is a long-running theme of Casey Research publications. It refers to the dilemma the US government has wandered into with its continued policy of rescue inflation. The "rock" is what will happen if the Fed pauses for long in printing still more money – the collapse of an economy burdened by an accumulation of mistakes that rescue inflation has been keeping at bay. The "hard place" is the disruptive price inflation that becomes more likely (and likely more severe) with every new dollar the Fed prints to keep the effects of those mistakes suppressed.
When the dollar was cut loose from the gold standard in 1971, the Federal Reserve was freed to create as much new money as it saw fit, whenever it saw fit. Enabled, it turned with enthusiasm to doing what central bankers imagine they are supposed to do – eliminate downturns in the economy. The Fed fancied itself as being on the answering end of a 911 system: whenever the financial markets signaled distress, whenever the economy came down with the flutters, the Federal Reserve would dispatch a van, an ambulance, a fire engine or even an assault vehicle, whatever seemed right but in every case full of cash.
To most people, rescue inflation was entirely agreeable. It made their world more comfortable and seemed to make it safer. Comfortable, yes. Safer, no. The pernicious but entirely welcome effect of rescue inflation was to cover up mistakes and keep them going. It allowed people – especially people handling other people's money – to make progressively bigger mistakes. Lending on implausible mortgages and buying securities tied to those mortgages are the most recent examples, follies that required decades of training.
Rescue inflation allowed everyone to get away with everything. The assurance that a high-speed vehicle with flashing lights on top would always arrive in time let individuals pay for houses with a little cash and a big mortgage. It let corporate managers rely on borrowing heavily, rather than selling stock, to raise capital. It let investors cheerfully accumulate junk bonds. And it let banks hire and set loose bright young minds to design financial gizmos with astounding leverage guaranteed to deliver excellently profitable results for so long as the economy continued on its excellent and guaranteed way. All of those hang-glider stunts seemed safe because if at any point the prices of the assets underlying anyone’s commitment failed to rise... a Federal Reserve rescue inflation vehicle would surely dash to the scene. That’s what FedVans are for.
And rescue inflation let the politicians dodge the consequences of their own thoughtlessness. The economic drag of the tax rules the politicians found convenient to enact and the effects that deficit spending has on economic growth and on living standards were obscured by the ready supply of that all-purpose balm and lubricant, new money.
But problems that are hidden don't go away; they accumulate; and they grow. Answering its most recent 911 call (the one that rang in 2008), the Fed dispatched an entire fleet of trucks stuffed with cash. It increased the money supply by 40%, yet today the economy is barely staggering forward. At this point, creating more cash might buy some time, but it can't buy a solution.
The problem, unless you think there isn’t one, seems impossible to solve. But rather than dismissing the possibility of a way out, it would be more circumspect to consider how the economy might in fact navigate between the rock and the hard place. That won't happen simply because we've found a way for it to happen. The White House hasn’t called me in a long time. But if we understand what it would take to slip past the rock and the hard place, we can judge how likely such a passage is.
The economy doesn't need anyone to fix it. It's all that fixing for the last 40 years that is the problem. Unmolested, the economy will right itself. The only thing needed is for the Great Molester, the government, to surrender to a serious regimen of behavior modification and let the economy operate without suffocating interference. Then it would be able to shed its problems – not painlessly but quickly and with a minimum of pain. Here's the protocol.
Bring out your dead. Even after catching the trillions in bailout money thrown at them, some financial institutions remain under water – closer to the surface than before but still snorkeling. Let them go. Release them from their zombie state. Bless them with the peace of zero assistance and the promise of unbeing. Paying the dead to mimic the living casts a blight on all the banks that are competently managed, and it leaves trillions of dollars of capital to be allocated by hired hands who've shown by their performance that their talents call them to some other line of work.
And give up on mouth-to-mouth for the biggest corpse of all. Stop trying to prop up housing prices by financing the banking system's huge inventory of foreclosed property and by funding programs to slow the foreclosure rate. The housing market won’t recover its health until prices reach a market-clearing level.
Stop the acknowledged deficits now. That means cutting federal spending drastically. There's already unanimous lip service for doing so, but even if there were a genuine resolve to do it, there are an infinite number of ways to go about it. A clean starting point would be to revert to the last Clinton budget, which would almost certainly require getting by on one war at a time. Stopping the deficits is essential to allowing the economy to heal itself because it slows the wasting of resources and because it eliminates the fear of higher tax rates, which is a fear that retards business investment.
Make tax rules a little less stupid. The two most mischievous features of the Internal Revenue Code are the double-taxation of corporate profits and the deduction for home mortgage interest. The former is a powerful and dangerous invitation for high debt-to-equity ratios; make dividends tax-deductible for the paying company, and the problem goes away. The deductibility of mortgage interest has operated as an amplifier for everything the government does to encourage overinvestment in housing. Yes, eliminating the mortgage deduction will be another blow to the housing market, but since we're committed to bringing out the dead, let’s think about cremating the remains.
Stabilize tax rules. High tax rates are bad enough for the economy. Not knowing what next year's tax rates are going to be is much worse. It paralyzes business decisions. Make the current rates "permanent" in the sense that it would take further legislation to change them.
Reduce the legal minimum wage to zero. Minimum wage laws are convenient for labor unions whose members are somewhat skilled, but they toss the unskilled into the economic dumpster. A minimum wage law effectively prohibits the unskilled and inexperienced from working by pricing them out of the market. It’s an unemployment guarantee program for millions of the economically weakest people in the country. I’d miss the minimum wage, because there is nothing that shouts louder that government uses the poor as human shields to protect the state. But to let the economy recover, let it go.
Destrangulate. Repeal the Sarbanes-Oxley law and its weird spawn, Dodd-Frank. Repeal Obamacare. Allow individual states to license drugs without waiting on the FDA. End all prohibitions on insider trading. Charge banks for FDIC insurance at rates tied to a balance sheet formula – and then free them to make their own lending decisions. (You might like even more deregulation than that, but we're not building utopia, we're only trying to avoid camping in dystopia.)
Euthanasia for Social Security and Medicare. Raise the eligibility age by one month every year. The unfunded net liabilities for those programs (variously estimated at $60 trillion to $80 trillion) will evaporate, and everyone who has been counting on impossible promises being kept will have plenty of time to come to terms with reality.
That would do it, and that or something similar is what it would take. The economy might need a year or so for the dust to settle. A certain number of mental breakdowns would be provoked by the trashing of heart-felt assumptions, but for the other 99.9999999% of us, the Greater Depression would be canceled.
It's not politically impossible. Everyone, politician and politician-afflicted alike, is capable of a 180-degree course change when fear and pain become great enough. It's not impossible at all. And unicorns aren’t impossible. Typically, they get started when a pony is fighting a cowlick.
At the just-concluded Casey/Sprott Summit When Money Dies, the all-star faculty unanimously agreed that the US economy is in dire straits… and will be for a while. But there are ways to protect your assets and profit from this crisis. Listen to John Hathaway, Mike Maloney, Richard Hanley, Doug Casey, Chris Martenson, and many more expert speakers on more than 20 hours of audio recordings – incl. their best stock picks and hands-on investment advice. Learn more.
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I say the solution is as simple as ending all centralized control That means ending the Fed and ending the stock market. The stock market has done nothing but destroy middle class wealth for over 100 years.
Let a corporation live or die by the products and services they sell. Today it is actually possible for a company to book millions in profit without ever selling an item to a real consumer.
IPOs have distorted the entire purpose of commerce. If it becomes known to insiders than a company is looking to go public, that comapny may see its orders increase far beyond the real market for its product. This is done so the first couple quarters will look very good with incredible growth. The growth sucks in the suckers who will end up holding the bag. The insiders and company exectutives sell off their shares cashing out big. The retailers get to write off the inventory on their taxes along with cashing out the shares the owners bought of the company they helped create.
There really aren't any workers to hurt in this game because the vast majority of the consumables are not made in the country they are sold. That is the greatest mistake. What really needs to be fixed. If a company actually has a vested interest in the welfare of its employees they will be less likely to engage in behavior that harms that relationship. When a corporation is nothing but a name slapped on some piece of junk made in a sweatshop the owners never see just to prop up a piece of paper some idiot with a computer is willing to buy in the hope of selling that paper for more than he paid you don't have a strong foundation to your economy.
Let a man with a dream to upset the established brand have his shot. If he can't do better than the behemoth then he doesn't deserve to succeed. However if he can do better let him kill the life sucking virus of economic stagnation. Nobody should have a right to prosperity through birth, given by faith, or backstoped by government. Prosperity should be continuously earned. h
Unfortunately what is suggested can't succeed given the real world and all the real people in it.
To go on a massive government austerity program while shredding the social safety net that many rely on will spur on more demonstrations, and soon enough instability when an army of tens of millions of unemployed, impoverished, disenfranchised and forgotten people decide they have nothing more to lose.
De-regulation has been the theme for 4 decades and the end result is where we're at now. You can always argue that the experiment failed because there wasn't enough of what failed, but we're out of time and resources to try again.
All the solutions to date have been political solutions: bailouts, mergers, QE, repealing mark to market....that theme will continue. But the Fed has created biflation: the real economy deflates with falling demand, personal net worth and incomes while costs keep rising, squeezing margins and destroying the middle class.
Or .... wait until the whole system crashes down in a smoking pile of wreckage.
...and rebuild from the rubble.
Aren't most of you traders? This lovely plan would probably lead to greater volatililty in the markets; a volatility so many of you bi*ch and moan about constantly.
If you are an insider just give me two weeks warning before this shit goes down and I will be an extremely happy trader.
Fuck the rest of you, and I mean that in the nicest way.
The more I try to wrap my brain around the end game of this fiasco the more I conclude gold will retain it's value when everything is said and done and paper currencies and debt instruments won't and their will be a lot of people upset and ruined. Everything happening right now will likely just turn out to be noise, a distraction, false rumors, and waste of one's energy trying make sense of it. At best they might be able to "manage" gold if they can avoid a complete collapse and somehow hang on to their precious status quo. If they lose control completely then you won't be able to buy gold in any bullshit currency. If I made book in Vegas I'd have to handicap the odds in favor of the latter.
Just what we need, another monetarist solution, that solves nothing.
This guy and his ideas are as dumb as a keynesian. No more monetarist dogma of any kind.
Glass-Steagall
Goddammit - I've asked before: how does that solve fractional reserve banking and private money creation? Are you in favor of sovereign countries borrowing their own money from private banks?
Well that was pretty damn simple-minded and hardly anything I haven't heard before.
Gee, cut welfare, social security, eliminate min wages. You forgot cut taxes on the JOB CREATORS and repeal child labor laws.
Honestly I understand this is the wrong forum for compassion and introspect on the actual human side of our country/economy. I realize profits and money are really the only thing respected here. And people are only valued here if they generate one of those things.
There's a reason socialist countries in Europe are happier, healthier and smarter than Americans. I think this article is a classic example of that.
fear is a bad street drug, hope know one you care about has taken it.
tax breaks tax laws and basic labor isnt nothing for self sufficient G
i guess we smoked the glass and the steagall's picked our bones
I dont see even a hint of political will to carry out what you just outlined. But I agree it is the correct medicine.
paper is almost as good as gold in the digital age
What a pile of BS. I've only been involved in one venture where there was ever any discussion of marginal tax rates in an investement decision -- and that was a venture in muni bonds where we needed marginal tax rates to be high
The right wing whore bag whines about tax uncertainty and then proposes eliminiating the interest on home mortgages.
He wants states to regulate drugs?????
What the hell do Dodd Frank and Obamacare have to do with the factg that the AWOL drunk from whom Coxon twice voted added the $5 trillion of FNM/FRE obligations on the backs of the taxpayer. Why don't the GOOPER/Ayn Rand whores every mention that?
Who gives a damn about the minimum wage? Almost every company I know faces the dilemma of outsourcing. The savings are huge,the quality actually improves. They have an obligation to their investors but what of their employees? IT, bookeeping, tech writing, back office processing, customer support can all be one cheaper overseas.
Sounds like one of those guys bitter at the federal government for shorting the stock market during the Clinton years.
america's refuge is that it is hard to repossess a tank.
america's refuge is that it is hard to repossess a tank.
Any solution without ending the Fed is a bogus solution.
Since we are talking about saving the economy, and all sorts of ideas are acceptable, I think I will throw mine out there.
I have 3 items.
1) Legalize and tax all illegal drugs:
The Cato Institute estimates that legalizing all illegal drugs would save the US Government 41.3 Billion on enforcement activities and add 46.7 billion in tax revenue. Total + to the balance sheet is 88 billion dollars.
DOJ Budget 2011 =29.2 Billion
DHS Budget 2011 = 53 Billion
Total budget for domestic law enforcement = 82 Billion
Thus, this action would pay for all domestic law enforcement and have a net 6 billion in increased revenues. In addition, the cartels and terrorist organizations that rely on these activities for funding would lose substantial amounts of revenue, and become less powerful.
10 year budget reduction amount = 880 Billion dollars.
2) Get rid of the Prescription Drug Benefit, and let Americans buy drugs from anywhere in the world where they can get them cheaper. Drug industry does not need the forever bail out, so lets get rid of it.
10 year budget reduction 600 Billion
3) Debt Jubilee of sorts.
Have the Federal Reserve buy all the principal residence outstanding mortgages, through their QE program. The MBA estimates total mortgages to have a value of 13.46 trillion dollars. So the FED does what it does best, issues treasuries to finance this buy up of all mortgages, and then prints the money and buys the treasuries themselves. Then it goes into its balance sheet and just deletes the items from both side. Poof the whole transaction is gone. Stipulate that any person receiving debt relief cannot put a second mortage on the home, that this debt relief applies only to principal residences, that banks cannot make loans to person accepting this relief unless they have sold the home, and some other rules to keep the system from going on meth again.
Hell the FED has put out 9 Trillion since this all started, to no avail, why not try this.
In any event these are thoughts, they may be of no value, and since I have posted late, no one may ever read them.........Bueller.......
One other thing to add.
Flat National tax of 20%. Collected by business as a sales tax.
Recession chances in the USA are 100% q1 2012-2014. I undertook little exercise to create:
Prediction chart of US debt max, default time, haircut,inflation
Its explained in more detail here:
http://saposjoint.net/Forum/viewtopic.php?f=14&t=2626&p=34423#p34423
All in all, US debt will reach 21 TRILLION USD in early 2016 at default. Taking into account GDP 2011 = GDP 2010 (14,7 trillion USD) and 4% /year recession 2012-2015, the ratio DEBT/GDP may be close to 170-180%. In any case, >150%. That is a bit higher than the ratio Greece had in 2010 ( 140%) which prompted bailout from EU and IMF to avoid immediate default. No one is able to bailout the USA in 2016.
Haircut will be between 50-75% in 2017-2018, so inflation roughly 25% a year. In 2016-2018, not earlier. This corresponds to USDX long term prediction chart (2012-2018) made here:
http://saposjoint.net/Forum/viewtopic.php?f=14&t=2626&st=0&sk=t&sd=a&sta...
and as related to it, but made earlier and independently, long term ( 2012-2018) EUR/USD rate prediction chart made here:
http://saposjoint.net/Forum/viewtopic.php?f=14&t=2626&st=0&sk=t&sd=a&sta...
so everything fits wiht deflationary recession in the USA q1 2012-end of 2014.
AND inflation in EUR zone with recession at the same period. Starting NOW, but surely in 2012.
This and other articles about fixing America fail to address the core issue: America has been hijacked by a gang of pirates.
This and other articles about fixing America assume that gang of pirates is going to change their ways and stop their pirating. Of course they're wrong.
Hijack is the appropriate term. They've taken control. Like hijacking an airliner or ship. They managed to get to the "command center" and take control there.
In this case the "command center" is congress on the front end and the justice apparatus on the tail end. Pirates took control of congress to get favorable laws passed and took control of the justice apparatus to prevent prosecution for violating other laws.
This explains how those pirates operate with such impunity. They know they won't be prosecuted.
For example the constitution is the supreme law of that land. But it's routinely ignored by these pirates, and none of them are ever prosecuted, because they control the justice apparatus.
There is no way to fix this problem. When the supreme law of the land is flaunted and ignored with impunity, America, a nation built on that supreme law, will die. It's just a matter of time.
Pirates loot and plunder. Looting and plundering a nation as large as America takes time. Lots of time. Years. Decades.
Why? Because they have to do it slow enough where people won't notice they're being looted, and they'll accept it without revolting.
In America it started more or less in 1913 with the creation of the Fed. The Fed was created by bankers for one purpose: To loot and plunder America.
And that's what we've seen ever since. Bankers steadily and gradually looting the nation's wealth via the Fed.
How? Simple. By printing currency. Bankers having the ability to print currency via their central bank, which they own, allows them to gradually steal all the wealth of the nation.
Yes there are other ways these pirates loot people's wealth, but currency printing is the major way.
They managed to get their central bank currency elevated to world reserve currency status. That was a major leap forward in their ability to loot and plunder. Now they could steal wealth from all over the world. They could loot and plunder every nation on the planet pretty much.
No, there is no solution. Pirates are firmly in control. The outcome is inevitable.
The pirates are firmly in control on both sides of the pond. The situation in euroland is as bad. French banks have 7 T assets out of which we don't know what percentage is toxic, in relation to dominoed sovereign debt. If its 10% that alone measures up to 700 billion. When you realise that french gdp is 2 T, then you see the size of the problem for EU's second economy. It Italy/Spain its even worse the bank toxic ratio to GDP.
We only got to this situation because this has been piratical play for twenty years and all 'elected leaders' have ACTIVELY played along or looked the other way.
French banks have 7 T assets out of which we don't know what percentage is toxic,
Who fucking cares how much of it is toxic, which really means worthless. Worthless loans. Worthless securites.
Who fucking cares? Let them go bankrupt.
This crazy idea that banks have to be "bailed out" and "recapitalized" is HOW THEY LOOT EVERYBODY. It's how they STEAL YOUR WEALTH.
No, it's not anyone's duty to save those banks. Let them go bankrupt and go out of business, like any other business with lousy management.
So what if they won't be around to loan irresponsible governments any more money? Who cares? Let those irresponsible governments go bankrupt too.
Don't keep loaning Greece money. Cut 'em off. Let 'em go bankrupt. Let that whole fucking piece of shit nation collapse. Fine. Nobody cares.
Sixty million frenchmen care as their savings accounts are in those banks. Don't try and act as if you don't understand financial reality : the banks know they have the population by the short hairs as they pretend to be TBTF IN EVERY NATION STATE, NOT JUST GREECE!... "If we go down LIKE DOMINOES you all go down with us"... So what is true for Greece, France etc. is true for USA. If the US banks go bankrupt, all your pension funds, all your savings, just go up in fumes. I wouldn't use the expression "who cares!" in that context...AS I DO CARE...of consequences, for me and family.
Get your ass(ets) out of those banks you crazy fools. You're ASKING for them to be stolen / lost / confiscated.
you can't do that on the macro economic scale. Impossible. Small businesses, pensions, RE loans with house as collateral. You are theirs. Learn the real financial world on a nation wide basis.
No, there is no solution. Pirates are firmly in control. The outcome is inevitable.
Most of the articles here on ZH are simply documenting these pirates' slow steady looting the nation ...and looting everybody else they can.
We get lost in the day-to-day details while missing the big picture. It's all one big looting spree ...especially since '08. In '08 they went into high gear looting.
This isn't a save the economy article, it's a"profit from the crisis ( quoted from the last paragraph of their own text) article and advertisemnet for online investment advise merchants with clearly designed copywrite to appeal to a reader who agrees with less tax and no minimum wage, and the like.
Firean, you're spot on. But what does this author assume about his fellow Americans?
bless Casey!
re "Destrangulate", how about abolishing all existing laws longer then 100 pages? Because frankly, if you don't even read the law, if you don't KNOW the law, if you have no chance of understanding the law, you stop being a citizen.
The whole purpose of the Plebeian Revolution was to have a body of laws any citizen could read and understand.
P.S. the last financial law the US passed was 22'000 pages long...
In 1966, at the age of 40, Alan Greenspan wrote a paper calling for the United States to return to a full gold standard and warned of the dangers of not doing so:
“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation…Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process.”
The way out of this Keynsian Depression.
This solves the debt problem, reduces/removes leverage and institutes full reserve banking which would prevent or massively limit future bubbles and crashes. It turns the economy away from pyramid schemes based on credit and turns money back into a productive tool.
People can continue to use credit, but it means they don't get to have their cake and eat it as well.
So the minimum wage is bad for workers and this guy wants it abolished as a favour to workers that can't find unskilled jobs. REALLY?! what a noble guy.
Gee those unskilled workers really screwed the entire financial system this time with their outrageous $5/hour demands.
Where to start...
As to the suggestion to remove social security, I think it only fair to also cut ALL US military funding, as the US military is/was the largest, richest trough for the rich to feed at, that has ever existed. Why did the author not address cutting the military?
this is a silly/ill-conceived piece.
Insipid, shallow, and pointless; a typical Casey Research article.
"Unmolested, the economy will right itself."
Oh year through starvation and survival of the fittest.
Market free hand is very fearful one
The world is awash in so many solutions to all its problems it is drowning in the indecision, self-dealing, and corruption to implement even one of them.
It's not any more solutions that we need to move forward, it is simply getting the politicians, laybouts, oligarchs, plutocrats, and status quos out of the way. Which is like saying, "Fuck the solutions. They will never happen".
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