American Gridlock

Authored by Lance Roberts via RealInvestmentAdvice.com,

Over the weekend, I was digging through some old posts and ran across a speech given by Dr. Woody Brock in 2012. Dr. Brock, is an economist who holds 5-degrees in Math and Economics. He is also the author of “American Gridlock” which is must read for anyone investing money in the markets.

The speech is as important today, as it was in 2012.

There is a huge debate over “Austerity” versus “Spending.” While conservatives in government talk a “good game”about cutting spending, budgeting and debt reduction, the exact opposite has been the case over the past several Administrations both “conservative” and “liberal” alike.

The irony is that increases in debt lead to further increases in debt as economic growth must be funded with further debt. As this money is used for servicing debt, entitlements, and welfare, instead of productive endeavors, there is no question that high debt-to-GDP ratios reduce economic prosperity over time. In turn, the Government tries to fix the “economic problem” by adding on more “debt.” The Lowest Common Denominator provides more information on the accumulation of debt and its consequences. 

However, the word “deficit” has no real meaning.

Dr. Brock used the following example of two different countries.

Country A spends $4 Trillion with receipts of $3 Trillion. This leaves Country A with a $1 Trillion deficit. In order to make up the difference between the spending and the income, the Treasury must issue $1 Trillion in new debt. That new debt is used to cover the excess expenditures, but generates no income leaving a future hole that must be filled.

Country B spends $4 Trillion and receives $3 Trillion income. However, the $1 Trillion of excess, which was financed by debt, was invested into projects, infrastructure, that produced a positive rate of return. There is no deficit as the rate of return on the investment funds the “deficit” over time.

There is no disagreement about the need for government spending. The disagreement is with the abuse, and waste, of it.

According to Keynesian theory, some microeconomic-level actions, if taken collectively by a large proportion of individuals and firms, can lead to inefficient aggregate macroeconomic outcomes, where the economy operates below its potential output and growth rate (i.e. a recession).

Keynes contended that a general glut would occur when aggregate demand for goods was insufficient, leading to an economic downturn resulting in losses of potential output due to unnecessarily high unemployment, which results from the defensive (or reactive) decisions of the producers.”  In other words, when there is a lack of demand from consumers due to high unemployment, the contraction in demand would force producers to take defensive actions to reduce output.

In such a situation, Keynesian economics states that government policies could be used to increase aggregate demand, thus increasing economic activity and reducing unemployment and deflation. Investment by government injects income, which results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth. The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment.

Keynes’ was correct in his theory. In order for government “deficit” spending to be effective, the “payback” from investments being made through debt must yield a higher rate of return than the debt used to fund it.

The problem, as noted by Dr. Brock, is that government spending has shifted away from productive investments, like the Hoover Dam, that create jobs (infrastructure and development) to primarily social welfare, defense and debt service which has a negative rate of return.  According to the Center On Budget & Policy Prioritiesnearly 75% of every tax dollar goes to non-productive spending. 

In other words, the U.S. is “Country A.” 

As Dr. Brock aptly stated in his speech:

“Today we are borrowing our children’s future with debt. We are witnessing the ‘hosing’ of the young.'”

Whistling Past The Graveyard

The U.S. has the labor, resources, and capital for a resurgence of a “Marshall Plan.” The development of infrastructure has high rates of return on each dollar spent. Instead, the government has spent, and continues to spend, trillions bailing out banks, boosting welfare support, supporting Wall Street and reducing corporate tax rates which have a negative rate of return.

In the meantime, the aging of the population continues to exacerbate the underfunded problems of Social Security, Medicare, and Medicaid which is roughly $70 trillion and growing. It is simply a function of demographics and math.

As Dr. Brock noted:

“Mathematics and Sex create performance anxiety in men – because you can’t fake the outcome of either.”

Two recent studies show the problem clearly.

Demographics is an easy problem to see and mathematically calculate. The ratio of workers per retiree, as retirees are living longer (increasing the relative number of retirees), and lower birth rates (decreasing the relative number of workers), present a massive headwind to economic solvency. 

Just last week, the Institute for Family Studies, published a report showing the decline in the fertility ratio to the lowest levels since 1970,

With fertility rates low, the future “support-ratio” will continue to be a problem.

The second, and more immediate, problem is the vastly underfunded savings of the “baby boomer” generation heading into retirement. To wit:

” Anxiety over retirement and how to support oneself after calling it a career is impacting many Americans. A recent poll found that one in three adults has less than $5,000 in retirement savings.”

This is simple math.

Currently, 75.4 million Baby Boomers in America—about 26% of the U.S. population—have reached or will reach retirement age between 2011 and 2030. A vast majority of them are “under saved” and primarily unhealthy.

This combination ensures the demand on the health care system, along with Medicaid and Medicare, will increase at a rate faster than it can supply. Bankruptcy, without substantive changes, is inevitable. The Affordable Care Act is a prime example of wrongly directed resources. While the goal of “affordable health care for everyone” is noble, the legislation only acted to massively increase the costs of healthcare, and the demand on the system, without improving the delivery and supply of the care itself. The shift of demand, without an equal shift in the supply, ensures that the entire system eventually bankrupts itself.

Of course, it isn’t just the social welfare and healthcare system that is effectively “broken,” but the economic model itself.

The Real Crisis

The real crisis that is to come will be during the next economic recession. While the decline in asset prices, which are normally associated with recessions, will have the majority of its impact at the upper end of the income scale, it will be the job losses through the economy that will further damage and already ill-equipped population in their prime saving and retirement years.

With consumers again heavily leveraged with subprime auto loans, mortgages, and student debt, the reduction in employment will further damage what remains of personal savings and consumption ability. That downturn will increase the strain on an already burdened government welfare system as an insufficient number of individuals paying into the scheme is being absorbed by a swelling pool of aging baby-boomers.

At some point, the realization of the “real American crisis” will be realized. It isn’t a crash in the financial markets that is the real problem, but the ongoing structural shift in the economy that is depressing the living standards of the average American family. There has indeed been a redistribution of wealth in America since the turn of the century. Unfortunately, it has been in the wrong direction as the U.S. has created its own class of royalty and serfdom.

For many, retirement years will not be golden. They will simply be more years of working to make ends meet as the commercials of “old people on sailboats,” promoted by Wall Street, will become a point of outrage. While the media continues to focus on surging asset prices as a sign of economic health, the reality is far different.

The real financial crisis in the future won’t be the “breadlines” of the 30’s, but rather the number of individuals collecting benefit checks and the dilemma of how to pay for it all.

As Dr. Brock suggests – it is truly “American Gridlock” as the real crisis lies between the choices of “austerity” and continued government “largesse.” One choice leads to long-term economic prosperity for all, the other doesn’t.

Comments

JimmyJones HillaryOdor Mon, 05/21/2018 - 12:56 Permalink

There a basic need for gov't spending, courts, law enforcement on the local level, roads, not at a minimum 164billion on black budget projects, or 21 trillion on "lost" military spending

As for borrowing, you should never borrow money to fund operating expenses and that is exactly what the Feds are doing.  Using debt for a bridge is one thing but to cover salaries for workers or welfare is nuts.

In reply to by HillaryOdor

MoreSun GunnerySgtHartman Mon, 05/21/2018 - 13:37 Permalink

An entire country and all its peoples in debt servitude to the jew supremacists- who would've imagined that? maybe Jefferson, maybe Jackson, maybe Lincoln, maybe JFK, maybe us ! 

https://www.youtube.com/watch?v=b-W_WwSknIc

http://www.tomatobubble.com/id1225.html 

Dumber than dumb Christian-zionists, thinking that hugging the anti-Christ is a good thing.

In reply to by GunnerySgtHartman

SDShack GunnerySgtHartman Mon, 05/21/2018 - 15:25 Permalink

Not only Feds & States, but businesses and people. ALL ponzi's eventually collapse, and that is what we have... a World Wide Debt Ponzi. The only people that benefit from a Ponzi are the creators. All "investors" eventually get wiped out unless they are the first to exit the ponzi. However, as more exit, the collapse is triggered. Plan accordingly.

In reply to by GunnerySgtHartman

nekten HillaryOdor Mon, 05/21/2018 - 17:50 Permalink

Keynesians assert the economy starts with spending.

They've got it wrong. It starts with producing something someone wants.

Removing the availability of capital from the private producer to spend it on "infrastucture" or whatever government tells us we need, hobbles the economy, rather than boosts it.

Then, rather than money circulating in the general economy, it typically lands in the hands of a few well-connected cronies, who use a part of it to ensure there is more of the same coming down the pike--for them.

In reply to by HillaryOdor

TrustbutVerify Last of the Mi… Mon, 05/21/2018 - 12:32 Permalink

Its been happening for about 6 decades.  The societal move toward dependency on government, combined with the exporting of manufacturing jobs which coincided with saving a nickel on imported goods (he or she doesn't haver much of a job but don't they feel so much better buying cheap goods that oh-so often last 1/4th as long!), which coincided with the false euphoria of "keep-the-party-going" deficits growing the total debt (keeping in mind the elitist hierarchy of pensions - they get theirs before you get yours). Its all part of the feel good evolution within our culture.  Think not?  When did you last make any real effort to buy an American product (and not a phony American branded product that was made in a foreign country)?  Even the (foreign made) jeans you buy these days aren't heavyweight denim anymore.  Fake wear washed into them.  They're designed to make you Look Good!  "Fake Macho," the new American male!

Walk into ANY store you shop (and/or especially online!) and look for where the products are made. 

One interesting aspect of all this is the "we know better than the old people" young people, the one's getting "hosed" want to keep this unsustainable calamity going.  They seem to vote for what's making things worse for themselves.  

In reply to by Last of the Mi…

css1971 TrustbutVerify Mon, 05/21/2018 - 15:16 Permalink

The trade deficit kicked in after gold was abandoned in 1971... And it shows in the charts.

You can't export gold that you don't have, therefore you have to export goods in order to import goods. You simply can't run a long term trade deficit in that scenario.

Pre-1971 the USA ran a modest trade surplus.

Along with the structural trade deficit, you pretty much by definition exported all the jobs as well. Because, well, who's making the shit you're importing?

The people sold their kids futures down the river for shiny beads.

In reply to by TrustbutVerify

American Sucker Mon, 05/21/2018 - 12:41 Permalink

Money is made of debt.  There is no way to get debt under control without separating money and debt, and there's no way to do that that won't cause a hideous economic collapse.  We're fucked.

sunny Mon, 05/21/2018 - 12:43 Permalink

This is all getting very old.  Every pundit on ZH points to the numerous problems, warning of mythic dangers yet no one offers solutions other than "must reduce debt".  

No one suggests how other than by sweeping statements of mature responsibility, i.e. nothing useful will happen.

serotonindumptruck NidStyles Mon, 05/21/2018 - 13:09 Permalink

If we could solve all of the world's problems by posting our suggestions and possible solutions on ZH, followed by implementation at the government level, then we would all have a true representative republic.

These days, if you try to make rational suggestions to your political representatives, you're likely to be placed on a no-fly/terrorist watch list.

In reply to by NidStyles

Indo_Expat serotonindumptruck Mon, 05/21/2018 - 17:32 Permalink

So? Did it ever occur to you that these dirtbags are your employees? You are stating that you are afraid of them putting you on a "watch list" even as your comments are anonymous? Are you fucking hallucinating? Do you actually believe anyone gives a flying fuck about anything you might have to say, or that your very existence is in any way relevant? You are a nothing, a zero and no threat whatsoever to the cocksuckers in power as they know you will never do shit to challenge them in any meaningful way.

It's cowardice like this that has destroyed America. No other factor even comes close.

In reply to by serotonindumptruck

To Hell In A H… Mon, 05/21/2018 - 12:43 Permalink

None of these authors are calling out the real culprit. We say the FED and Goldmans, but we never say who they really are. This indebting of nations starting in the 3rd and developing world, but it was far away against the sand niggers, the browns, the niggers and those funny looking Asian people. 

Now the banksters have applied the same method at home in Europe and the North America and our political class have paralysis. Who is issuing this debt? Who can pluck FIAT money from their rectums and purchase bonds etc? Who has the exclusive right to do that? 

Don't worry, Orange Jesus will save us, because the acronym MAGA said so. Don't worry, Trump's buddies are doing Gods work.  We are now saved. 

bobsmith5 To Hell In A H… Mon, 05/21/2018 - 13:11 Permalink

The FED and Goldman's are owned by Satanist Rothschild/Rockefeller who hide behind the word Jew so that you are deceived again when you are lied to by communist who hide behind the word democrat.

They want you to be blinded by racism as they rob you, thus breaking your capacity to think clearly and see who the real enemy actually is. And clearly, in your case, they have succeeded beyond their wildest expectations.

In reply to by To Hell In A H…

Don Sunset Mon, 05/21/2018 - 12:45 Permalink

Blame for accelerating this crisis can be put on the Orange Joolius.  It will be evident in a few years when taxes will have to be raised while we are in recession.

Don't vote for the RINOs that voted YES on the budgets and tax reform.

HuskerGirl Mon, 05/21/2018 - 12:47 Permalink

"The real financial crisis in the future won’t be the “breadlines” of the 30’s, but rather the number of individuals collecting benefit checks and the dilemma of how to pay for it all."

What is left for them to do other than confiscate resources from those of us that have saved and invested?

It's easy to do through taxation for income, eminent domain for real estate, and civil asset forfeiture for hard assets. All have been deemed legal by SCOTUS.

Nothing will be safe when things finally hit the fan.  

skeelos HuskerGirl Mon, 05/21/2018 - 13:14 Permalink

 

They'll exhaust measures like means testing and siphoning of IRAs and 401k "for our protection" before outright confiscation.  The question is whether they can hang on long enough for the Boomers to die off enough to no longer be the dominant voting block.  Once GenX and Millennials figure out en masse how the Boomers have screwed them, it's all over.

 

In reply to by HuskerGirl

Indo_Expat skeelos Mon, 05/21/2018 - 17:45 Permalink

The Boomers will finish you off long before, mincing, prancing millennial faggot. You little fucks have added a new dimension to cowardice, attacking your elders that you perceive to be defenceless instead of going after the actual culprits in government. How easy... and safe.

You are toast you little cocksucker, along with your lost generation of limp-wristed eunuchs and purple-haired freaks, tweaks and AIDS infested geeks. We will live to see you worthless, useless mutant parasites bulldozed into burn pits en masse, clacking our dentures with glee.

In reply to by skeelos

bobsmith5 Mon, 05/21/2018 - 12:59 Permalink

The entire monetary system is a fraud, a lie, isn't real, therefore there is no debt.  To whom is the money owed when it's not even legal money as is defined by the constitution.  When the people wake up to this reality they will discover that all their wealth has been stolen by this massive crime committed by the owners of the central fiat banking system.

How can you be in debt measured by a debt instrument which consist of an I owe you nothing?  Repudiate this lie, repudiate this debt, and set yourself free.