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Friday, January 30, 2009

Economy worsens as Republicans oppose Obama's stimulus package

The economic signs are really depressing, so I'll spare you the details. Bottom line: our country is in a great deal of trouble. We've borrowed too much and lived beyond our means. Rather than allow a contraction, our government is choosing to intervene. Obama's stimulus bill would create jobs rebuilding America' infrastructure.

Typical of Washington, the earmarks which Obama has protested seem to be finding their way into the bill. However pure the intent of the stimulus package, it's instantly diluted once it hits Congress, as special interest groups, taking a cue from the financial services industry, vie to draw in the most government aid.

Government dispensations flow to the largest corporations. If your employer is sufficiently large and influential, they may be considered too big to fail. Government intervention may or may not save your job. Recipients of the funds may end up downsizing anyway, with or without a bailout.

Channeling sympathy is the job of any good politician; the worse the impact of the recession can be made to seem, and the more vital the industry, the more likely it will be heard, assuming its flock of lobbyists pester Congress as before. Of course federal money can only go so far, which means there will be winners and losers, both among corporations and those who represent them, not to mention the poor people who live in those districts.

The way the game is played matters immensely inside the Beltway. Obama is getting his first lesson in Presidential politics. By pushing so hard for his stimulus, Obama has encouraged every Republican to obstruct the passage. Making matters worse is the Republican predilection to favor TARP spending--which largely benefits banks and the investment class--while disparaging the stimulus bill, which to them is a mammoth pile of pork.

Yes, the Republicans have rediscovered fiscal conservatism, but they're not so populist as to want to cut out their wealthy banker allies. Real economy results appear subordinate to protecting shareholders in financial services companies, which have tanked despite the bailout.

TARP doesn't appear to have increased lending. As a matter of fact, the banking subsidies helped pay out the 6th largest amount of bonuses in Wall Street history. If there's suffering, it's not by those at the top, unless of course you include spoiled office remodeling. John Thain, the fired head of what was Merrill Lynch, retroactively dismantled a $1.2 million office renovation. Alas, the hardships of the chief executive job--and no golden shower rods or reaffirmation parties in Sardinia either.

Obama attacked the bonuses in a video. Today, I saw that the New York Attorney General Andrew Cuomo was investigating the bonuses (Bloomberg article.) I don't see how the government meddling, whether in the form of financial help or moral castigation, will help the industry, if it is unwilling to see the need to change.

As much as the banks might make a juicy target for politicians, the bailout has been embraced by the political status quo. Help for banks made sense then, but maybe less so now. We all know the GOP/super capitalist class nexus socialized losses and privatized profit, to quote NYU economist Nouriel Roubini. These are the fruits of a matrimony between those with influence and the party in power. Into the campaign coffers of Republicans (and Democrats) go mammoth donations from Wall Street, out of Washington comes literally trillions to help the distressed industry, which is showing a remarkable lack of distress. It seems to matter little who is in charge at the top, if the system of patronage continues undisturbed.

Now if the Democrats weren't on the receiving end of so much corporate donations, they'd be more likely to stir populist sentiments, which undoubtedly lean towards support for the stimulus far more than they do for TARP, Act One or Two. The public sees hard-working blue collar stiffs as far more deserving than the banker suits who repossess poor people's homes, drive fancy foreign cars, and remodel second homes.

The Republicans have long been the party of the rich: white, anti-immigrant, reactionary, and greedy, or as they say, "pro-business." Well, if Republican leadership on the economy had been so good for business, why are we in the worst recession since the Great Depression?

None of this should come as a surprise, despite the spin that our elected representatives are on our side, or even represent our best interest. Then again Americans tend to believe what they read in the papers and see on TV. Perception matters more than reality. Sell it long enough, and the people believe.

The 2004 election gave the most glaring evidence of a gap between perception and reality. Many people were convinced that George Bush was more like him than John Kerry. They trusted him more as a result. If however, someone like John Kerry comes along, appearing aloof and oozing eliteness, they distrust them. This is the dumbing down of the electorate reflected in their choice of candidates.

When I was selling insurance--yes, I regretfully inform you that I once did do that--I remember how hard it was to convince people to do something, even if it were as obvious as picking up some life insurance to cover what would be a catastrophe if uninsured. People distrust you if you're in a suit. If however, you can come across as somehow being like the client, and trustworthy, you can sell them.

After so many years of Bush, we are only now waking up now from the nightmare created by this image-is-everything style of identification between voters and the people they elect. This bonding is illusory, encouraged by media saturation, like any other brand. In fact, there is nothing in common, nor any commonality of interests, beliefs, or views. Bush was simply taken to be credible by a majority, enough to let that approach dominate.

Why is this important now? Obama needs to maintain an image in order to sell his stimulus, or anything he wants to get passed. Now with Kerry and Gore, people don't have a problem with politics or positions as much as they object to an image, one that's not compatible with predetermined commonalities, suited in illusion. Preserve your image and stay Presidential, look like anything less than a President, and people will think less of you.

Now Obama needs to turn this Rovian approach to dealing with the electorate to his favor. Essentially he needs to say, "I am President. I make the rules. Everyone obey me." Now of course some people who actually use their brains will oppose this style. But assuming the inner Beltway circle of well-vetted pundits, talking heads, and Insiders remain confident that the status quo will remain preserved, they'll give the President a great deal of latitude.

This is the seat of power we're talking about here people..the center of an empire. An impression of a secure, Big Daddy-type patron in charge reassures the public. We see the best out of Presidents in times of challenge and Obama needs to step boldly forward. This was Bush's bullhorn moment in the ruins of 9/11--it's what the country needed then, just as it needs now.

If image is everything, Obama needs to come off as self-assured, and play on his strengths. He can't hedge, or waffle like a Senator. He needs to come off as knowing what's best. Now unfortunately, Democrats in general take to this role quite awkwardly. Being basically more intelligent, they want to rationalize and calculate, hem, haw and saw towards the best possible course of action, allowing dissent, overcoming objections one-by-one, and going about things in a conscientious, reasonable fashion.

Screw all that. Abandon reason and act as if there's no other way other than the President's. Call a press conference and dominate. Make it so the journalists want to lob softball questions, just so they can get in your graces--punish them if they don't. Push the Presidential aura, 'til it leaves everyone in the room awe-struck by the brilliance and confidence of our new Commander-in-Chief.

A master motivator I knew once said, "never dip." Don't let the client see you hesitate--don't allow yourself to lose control over the situation. To sell, you need to be completely and utterly convinced in your soul that what you are doing is in the best interest of the client. If you so much as blink at the wrong time, hold back a little bit, or hesitate when the time to close the deal comes, you'll lose the sale.

Obama's lack of experience at the chief executive position is becoming clear early in his administration. He's never utilized the real weapon of the office of the President: credibility. He drips with it now, but not if he must conscientiously assemble an agenda, run it before his Cabinet and whoever else wants input, re-form and re-submit it.

This is no faculty committee, it's the United States of America! Get up there, say what needs to be said, and make everyone in the room quiver in anticipation because you, the President, are the most powerful person in the room and can get it done. The mission is accomplished because you say it is! Screw reality--that's what you make. You're President!

Instead, this smart new President is trying to frighten Congress into passing his stimulus. The "be afraid" mantra has grown stale since the days of John Ashcroft's "actionable intelligence." Trying to scare hardened politicians isn't so effective--they're far too jaded and skeptical of motive, or at least the GOP is just not going to go along like the Democrats did under Bush. Bush's great "opportunity" (let's hope Obama doesn't get his 9/11), allowed him to wield dictatorial powers under the President's self-appointed "responsibility to protect the American people under the Constitution."

As it turns out the theory of an all-powerful Executive branch has been revived as a potential legal defense as rumors of a torture investigation into the Bush administration personnel emerge. The "unitary executive" theory is really a construct of conservative Berkeley law prof John Woo. According to Jason Leopold's article, Woo designed the expanded legal authority of the Presidency around Bush's War on Terror aims, which included the legitimatization of torture, rather than codify any pre-existing authority inherent in the Constitution.

Blinking--the act of deciding to do something without thinking the consequences through, was a hallmark of Bush's leadership style. When 9/11 happened, the response seemed proportionate and timely. Never mind that our reaction may have been directed at people who'd had nothing to do with it. It simply felt like the right thing to do (remember: perception is everything.) Never mind that the extradition and prisoner abuse might forever tarnish our nation's reputation--it's not how we reacted that counts as much as that we reacted, strongly, and decisively.

Obama needs the equivalent of a tool box to fix the economy's problems, or perhaps even a well-supplied cache of ammunition to shoot down critics of his relief plan. The chief beneficiaries of government assistance have been bankers and other fat cats, hardly a group which inspires faith that the government's response is 1) working or 2) helping the people who really need help. To craft an effective and popularly acceptable response, the economic problems we face need to be brought down in size, to manageable proportions, so Americans feel that they can deal with them.

Nevertheless, effective presentation is crucial in managing perception. In this era of media saturation, so much clamors for our attention, with so much noise and hype. The President can slice through all the noise only by making a big enough bang or channeling the more primitive instincts of the American public, like the thirst for vengeance after 9/11.

The threat to our economy needs to be posed as if it were on a similar level of threat to our way of life as terrorism, to give it a villainy on par with al Qaeda. Clandestinely, we probably consider job security as important to our way of life than the threat of terror which despite 9/11 has worn off and done little to change the way most of us live our lives.

As it turns out, neither 9/11 nor its reaction have brought the breadth of impact that the economic downturn has, despite the turmoil caused abroad and the disruption in the lives of our servicepeople and their families. A record number of veterans have committed suicide, a direct consequence of failed marriages cause by too long deployments, and untreated Post-Traumatic Stress Disorder.

Obama risks being a one-term President if this economic situation can't be remedied by his stimulus. Now the Republicans, who took a leading role in gutting the regulatory climate--thus precipitating the banking crisis--know that their best chances for victory in 2012 lie with an ongoing economic malaise. In this sense the banking crisis has served as a type of economic bomb, a Trojan horse left in the White House by the departing Bushites.

Guess who doesn't want Obama to cure the economy. The Republicans. If Obama can't solve the crisis, he can't have a second term which I'm sure is the top priority of any new administration.

Political divide

Partisanship has become part of how we are governed, or in the case of the obstructing the stimulus, how we aren't governed. Anyone who opposed Bush and his post-9/11 agenda was pilloried as unpatriotic. This tactic should marginalize anyone who disagrees with Obama's stimulus. Are they real patriots? Do they really want the Chinese to take over--just who are the Republicans working for? Why don't they want us to succeed? They want the economy to fail.

These are the kind of tactless innuendo that Republican aimed at the timid Democrats when they dared oppose Bush's wars. Will they be used to drive the GOP heathen back to their rapidly eroding Red State base of support? No, Democrats will hesitate, quiver in their infirmity, as they lack the dramatic inspiration of 9/11 to bulwark their political agenda.

The Democrats and Obama can't assert their control like the Republicans did. Part of this is the introspective, reconciliatory perspective of most liberals. Liberals tend to be a enlightened lot, a group that takes dissenting opinion perhaps a little too seriously. Once committed to a cause, though, liberals can bring a lot more high ground to their positions, as they tend to be better thought out and more inclusive of a variety of opinions and perspectives.

Perhaps the biggest problem of deliberate liberalism is its intellectualism. In a crisis, solving tough problems requires far more assertive behaviors, requiring tactics that simply aren't very nice. Reason can actually be a political liability. Rather than helping achieve results, building consensus is seen as a willingness to compromise, or be infirm against a dire threat, waiting for committee reports instead of going out there, killing it, and dragging it home.

Tom Tomorrow's cartoon book, Hell in a Handbasket, does a great job showing how weak Democrats are in the face of Republican domination. A couple of his cartoons paint liberals as constantly bending to defend themselves from Republican attacks, no matter how preposterous.

Perhaps the best way to show that liberals mean business is to start a fight. Stick with it to the end, right or wrong, and force people to pick sides. This is the opposite of reconciliation. Once enough momentum build around the position--right or wrong, reasoned or unreasonable--even the opposition will learn that that you mean business.

9/11 succeeded in displacing any trace of obstructionism like the GOP is now showing in standing up to Obama's stimulus. The Republicans in power were able to channel the debate, focus the political argument around concepts like "you're either with us or against us." Or "the terrorists want Bush to lose." Or "support the war President" or else "you want us to lose."

I think the Democrats performed the sin of letting the Republicans steer policy, without criticizing them or behaving like an opposition party. They probably noticed popular support for Republicans was wavering as Iraq devolved, and simply chose to let that trend continue, whatever the impact the war would make or the benefit of standing up to it.

With Democrats in control for less than a month, the Republicans have coalesced around opposition against the stimulus. Never mind that putting off the bill might costs millions of jobs, never mind that we need infrastructure, or that the TARP monies which are essentially part of the same problem appear to have done nothing. The bottom line is that opposition parties oppose. As a matter of fact, the Republicans are doing what the Democrats should have, except without 9/11, the great consensus-builder and dissent-crusher.

Maybe if things get bad enough, enough people will start to question why the government wasn't willing to help. The Republicans probably figure that the ongoing economic fallout will translate into political points. but they do need to be doing something. if they just sit around and complain, I can't see how the ongoing economic deterioration will help them at the polls.

Democrats are eager to paint the Republicans as obstructionists, but there are some real issues with the stimulus package. First it is huge, having bloated to above $900 billion. Second, it's not clear how soon the benefits of spending will really make an impact, despite all the rhetoric about "shovel-ready" projects. Yes, there are clearly plenty of people--not necessarily working man types--drooling over massive infrastructure spending, but just how much unemployment will that erase?

The benefits of federal spending tend to coalesce around insiders who have the most influence to buy and deepest lobbying pockets. Under new You're on Your Own conservatism, created by Reagan but sustained during Clinton by his welfare-to-work, policymakers feel little fiscal obligation to the poor. Little encouragement is offered to the "Little People", who of course suffer disproportionately in any major economic crisis.

While a few million might cling to their jobs, what we have is a massive demographic problem. A lot of people don't have jobs because we've gotten older as a nation. We simply don't need as much stuff. Much of our population is retiring. The economic growth we've experienced during the Boomer years is now having its inevitable reverse impact: the long-dreaded contraction. And the corporate world is taking it very badly. Unlike government, which aims to provide the same services every year, businesses always need to get better, and make more money doing things more efficiently.

Downsizing may have made sense when companies were experiencing large amounts of organic, bottom-line growth. But now as demand falls, people buy less and less is made. Rather than increase productivity, the shrinkage actually decreases sales, or at least the growth in profits. Flatlining profits make investor capital that much harder to attract. Stock prices need to be constantly moving up--if organic growth can't be achieved, an increase in efficiency is sought, but constant reductions in the workforce can't keep companies profitable forever.

The American workforce is the world's most prolific, so it doesn't make a whole lotta sense to simply downsize until we aren't making anything. No one here in American--not investors, nor downsized workers--comes out ahead if that should happen.

Misdirected priorities

We see in TARP One how the Treasury saw fit to buy bank stocks; the fear has been about losing investment appeal, not about saving the economy through more lending. The priorities of the program have been to subsidize the massive losses incurred by de-regulation, too much cheap credit, and eviscerated regulations coupled with bottomless greed of the wealthy.
The Republican agenda has been mirrored in the policies of the past eight years, culminating in the TARP program. TARP has been Robin Hood-in-reverse, a methodology to use public monies to enrich well-placed vested interest within the Republican political hierarchy. Now if the Democrats weren't beholden to the same interests, they might be able to come out and point the finger like they should. But so corrupted has our government become that we really can't have true opposition politics.

The only true opposition there is comes in the form of anti-corporate factions inherent in the legal profession, not-for-profit community, and the labor unions. It's not a coincidence that the Big Three had to fight so hard for just a tiny sliver of the TARP funds, as the Republicans savor the idea of unions busted, whatever the economic price to Rust Belt communities. For Republicans, the loss of Michigan automakers is far more acceptable if the unions are decimated in the bargain. Many foreign automobile manufacturers have landed in Republican districts, where unions have been shut out, so their consituencies are less likely to feel the impact--if anything Detroit's overseas competitors will stand to profit.

What's happening is that our nation is breaking down under the weight of partisan division. The Democrats could do a whole lot better job of attacking the Republicans for not doing enough, but they too may be using the current crisis for their own political aims. As long as the Republicans don't help, the Democrats can claim to be the party actually helping Americans. At some point the two warring parties needed to be dragged, kicking and screaming, into the White House to force a deal. That's where the President comes in.

Contrary to what Larry Kudlow of CNBC might say, the stimulus really will be needed before the second round of TARP. A rich guy, Kudlow likely benefits more from stock market investments if the banks get help, rather than if some bridge gets built. Labor has been, and will likely always be, the enemy of traditional managers, although it need not be that way.

Obama stirred some cages on CNBC today with his talk of strengthening labor unions. Somewhere along the way, the investor class decided that there was no way organized labor could be good for them. Destruction of the middle class has come alongside the loss of manufacturing jobs, so unions are enjoying a resurgence in influence, at least at the White House. Vice President Biden is heading up a Middle Class task force, which shows the White House does share common concerns with the plight of the American worker.

The one-sided Bush years are over. The conservatives that have viewed labor as an impediment to economic growth are no longer in power. The days of easy corporate profitability are also over, replaced with what I guess is a heavily subsidized manufacturing core in those industries that can't compete with foreign producers. Somewhere, somehow, the American manufacturing base can compete and win, but maybe not with so much help for foreign automakers (although their transplants seem to do quite well here.)

To get the economy growing, we need to export and focus on things we do best. Mass producing cars may not be among them. Still, there's no reason why we can't make cars here: we answered the challenge posed by the Japanese in the Seventies, retooled, and made our automobile industry competitive. Ironically it was Detroit's upper management that clung to the idea the SUVs were the future, not labor who may have seen the need to change to more fuel-efficient--albeit less profitable--vehicles.

We could do things differently--our focus needs to be on specialty manufacturing. Let the Japanese and Korean style of car manufacturing dominate; Big Three should be making something else you don't mass produce. The invisible hand of the free market is supposed to redirect manufacturing to those who do it better. Judging by the success of transplants, American labor can fit the bill. I've heard that some of the Japanese cars have actually made their way back to Japan, a promising indicator of the potential of American-based manufacturing. They're doing something right, although the ride in these tricky economic times is hardly steady for them either.

Now if labor unions really can assert substantial influence over Washington, I think they'll be inclined to promote protectionism, although I'm sure even the average factory worker is well aware that we can't win in the global economy if we don't compete. Yes, there might be more employment security if we start slapping tariffs on imports, but surely the same will be done on US-built fire trucks and rescue vehicles, of which I saw many in television coverage of the Szechuan earthquake a few years back.

I think an argument to renegotiate our trade agreements is in the works; we must demand fair trade. Health care is a valuable part of that formula, as the cost adds $1,500 to the price of every American-made car; hardly a level playing field considering we're the only industrialized nation without universal health care. Unconditional, unmonitored free trade without any consideration of extenuating circumstances is a big problem for our manufacturing sector. The ideal is that corporations will adjust, focusing on their specialties, but this can hardly work if government subsidizes failure, either directly or by protecting domestic manufacturers through a tariff.

We'll also need a whole bunch of infrastructure improvement to compete. Our bridges, rail lines, utility infrastructure, and roads are deteriorating. This is a problem that must be addressed. Over the longer term, we need to "internet'o'fy" all of America, allowing high-speed internet into every home. People can learn on the web, re-educate themselves, and prepare for a post-industrial society. Of course the change will be painful, and require substantial investment of time, money, energy, and the popular will. Above all, we must convince ourselves that change is necessary and that we can't keep going on as we have.


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Tuesday, January 20, 2009

Obama's time has come

Barack Obama has gone to Washington, in what seems to be the longest transition of Presidential authority ever. I am surprised by the upswell of positive anticipation which surrounds the event. I am not as pleased however, with the coronation ball kind of theatrics. These tend to inflate the President into a celebrity. Barack was chosen by the people, I know, but it just seems so Bush-like to put the man on a pedestal.

Perhaps I've been too long outside the margins to accept that a President--any President--could actually represent the Little People, or even care. The discrepancy between those who reign over us and us became clear with Obama when his handlers wanted to take his Blackberry from him. I was reminded of the treatment of the Chinese emperor Pu Yi in the movie The Last Emperor, or the youthful Dalai Lama as shown in Seven Years in Tibet.

Once elevated from the status of ordinary human to someone nearly divine, the Emperor is meant to be pampered. This elevation represents separation from the rest of us, simple mortals that we be. I don't see how any human being can't avoid being influenced by this pampering, and find themselves out of touch if not completely cut off from the world outside their well guarded, cloistered compounds.

Obama has said he intends to stay connected, a principle his handlers must find utterly terrified. We don't know who these people are, telling him he can't have his Blackberry, but just like the hunched-over eunuchs surrounding Emperor Pu Yi, these insiders want exclusive control over what Obama learns from the outside world. Their source of power over the monarch is controlling what he sees, hears, and ultimately does.

While the last emperor Bush may have come and gone, the system that surrounded him isn't. The caste system surrounds those in power in Washington, as archaic and convulted as any Imperial Court.

Whatever differences Obama may have with Bush tend to get overshadowed by the Presidential regalia and magnanminity, which makes the President's Club an exclusive one indeed. Obama may represent the anti-Bush, a man whose values contradict his predecessor's. When the doors that stand between the men in power and us, the people over whom they rule, close, who's President ight make little difference in the lives of most of us.

A good test of the fraternal bonds between Presidents will be whether or not Obama's choice of Attorney Generals, Eric Holder, pursues an investigation of the Bush administration for war crimes and torture. If not, the fix could be on--the rule of law subordinated to the whims of men, Presidents, yes, but just men. See Dr. Jerry Loo's article on this topic in OpEdNews.com.

I thought the Constitution was about overcoming the rule of men, by replacing it with the rule of law--objective, a little stale and formal, imperfect, but still a system which works best largely because it prevents agents of our government from ruling over us. Can the Constitution survive this most recent challenge--or will the authority of Presidents past and future--the rules of the Gentleman's Club--reign supreme? Maybe we've come to accept our Presidents as celebrity cum laude, kings to whom we grant nearly infinite power (or at least power which seems infinite compared to ours.)

Into such a system can a man of principle enter and not be affected? Most people born into the ruling caste get acclimated to their positions from birth, Senator's sons they typically are. Obama is clearly different in this respect, and may harbor illusions that he isn't as different from us Little People. Maybe the idea that Obama is one of us threatens the status quo or, if it's an illusion, it surely serves the interest of the Establishment to project an image of cooperation and shared values between ruler and the ruled. This solidarity can reduce the friction that occurs when a populace feels exploited by its ruling class.

Perception = reality

Americans worship celebrity. Obama has become a celebrity just as Bush was the antihero. If the replacement ruler can ease some of the people's many burdens, real or imagined, I'd say the coronation is a productive ritual--an end in itself. But as for the betterment of the American economy, or much of an improvement beyond some policy changes, I wouldn't expect very much. In many ways Obama will be correcting the damage Bush has done, erasing negatives, not necessarily charting a new course for prosperity, no matter what we want to believe.

I discussed the American's people fixation with change, to the point Obama can represent change and score political points. The most significant change is Obama's race. Maybe it's Obama's ascent that is the change, not what he can do to change the lives of ordinary Americans although I do hold high hopes. Undoubtedly, Obama's climb to the top represents a remarkable achievement, one that does inspire average people, and can encourage them to do great things, much like Martin Luther King Jr. did.

Obama will be able to lean on King's legacy, to borrow from the civil rights pioneers the spirit of resistance, "we shall overcome." Yet Obama's race alone doesn't entitle him to claim King's legacy--he's going to have to show that he honors King's values, earn it. Sharing his African heritage with the Reverend King does allow Obama to confront the fundamental injustice of poverty and inequality, to seize the high ground.

Obama will keep King's achievements close to his heart. Still, on some levels Obama seems inclined to disregard King's message on the immorality of war. King's is a fundamentally antiwar message; it can resonate with the world community battered by our imperial hubris and give Obama a major source of strength from outside our borders, giving us help to reach our foreign policy objectives.

Yet the opposite path, one of war and destruction, can continue to haunt the Obama administration and defile M.L.King's real legacy. For those labelled "terrorists," Obama appears willing to inflict more devastation, whether in Afghanistan or on some other battleground of America's (or Israel's) choosing, regardless of whether or not collateral damage--dead kids--is involved. [By the way, Rice signed a last-minute agreement with Israel to use American intelligence and manpower to stop the rearmament of Hamas. See this excellent article on Gaza and Obama by Arthur Silber.]

To stop the tide of militarism released by 9/11, a more thorough inquiry could dispel the notions that 1) that al Qaeda acted alone, without the cooperation of any foreign government and 2) our government didn't know the attacks were coming. As unpalatable as these conclusions might seem, they are part of a drive to determine the fundamental truth, which King would have demanded, especially if 9/11 was the causus bellum for so much blood-letting.

Perhaps in isolating the event from its Official Explanation, Obama will see that the knee-jerk response to 9/11 had little to do with preventing another 9/11 and was all about Caspian oil and a second term. In adopting King's positions, and confronting the Official Explanation with an inquiry of truth, the world might be spared untold suffering as American-built bombs drop and missiles fly throughout the Mideast.

Sorry to sound the grinch on such a historic day but I'm finding it hard to see what will change largely because I keep thinking of what won't change. In foreign policy these include:
1) ongoing occupation of at least one nation--Afghanistan--in Asia.
2) continuing meddling in the affairs of Pakistan, Iran, and Iraq
3) unconditional support for Israel's actions, no matter now egregious or unpopular

Gaza brings to light just how powerful the Lobby is in America. In his campaign speech before AIPAC during the summer, Obama more or less said he'd do whatever he could to help Israel, including a military confrontation with Iran. Much of this talk was likely political posturing, as Jews contribute huge sums to Democratic candidates. Still I don't know how Obama can achieve any foreign policy successes if his policies continue unchanged from his predecessors. Iran became such a target on the campaign trail that a real war between Israel and that state could bog us down for years, and consume the great majority of our resources and the skills and attention of our leaders.

Obama has reiterated his speciality will be domestic affairs. I simply don't think he'll be able to spend as much time to resolve our internal crises as long as the US has over 600 forward operating bases scattered in over 100 nations, a provocation in itself. All it will take is one angry terrorist to consume the bulk of the new Administration's attention in the recovery and sustaining the reaction. We don't know what response a terrorist attack will justify, but if our foreign policy remains the same, it'll mean another war and occupation in southwest Asia.

With deft managing by Hillary Clinton, and a lot of luck, events in the foreign policy arena might allow Obama to focus primarily on domestic issues. Here are the domestic economic challenges that will arise:
1) Trillion dollar deficits. Obama's domestic policies will ensure. These are due not only to war, but new bailouts and stimulus packages.
2) Declining manufacturing base (free trade over fair, China's gain=our loss.) Protectionism will have its appeal, especially as the slump drags on and Chinese exports are subsidized by an undervalued Yuan.
3) Declining dollar due to a weak balance of payments. We aren't making enough real things here. A cheaper dollar should make our exports cheaper and more competitive. However without a strong export infrastructure, a cheaper dollar hasn't proven to be anything more than an accounting gimmick.
4) Corporate media monopoly distorting what the American public knows and thinks, censoring by omission, and redirecting debate away from substantive issues towards a "centrist, pro-business" Washington consensus. The decline in newsprint/TV news is a free market force which has punished conglomerates and pushed millions to Web, so keep the crap coming Murdoch!
and 5) a Federal Reserve system composed of for-profit banks exploiting the monetary system through fractional reserve banking and the constant depreciation of our currency (96% loss of purchasing value since 1913).

Nothing substantive can come of Obama's time in office unless these systemic problems are addressed (unless of course we consider his election in itself an accomplishment.) Each challenge must be understood, which requires paying considerable attention to the various special interest groups in Washington, as well as playing the perception management game.

Very little is achieved in Washington that doesn't serve the interests of a corporate constituency (like the military industrial complex.) Weaning our government out of these long-standing co-dependencies will be nearly impossible. Obama might be able to use Presidential powers created in the post-9/11 environment to force change through the bureaucracy, a sort of good tyrant approach. Kennedy did issue one Executive Order authorizing the Treasury to issue money directly, just before he was shot, so maybe #5 above--limiting the Fed--should wait a while.

Judging by his Establishment picks in his Cabinet, Obama is pragmatic and prone to compromise--skills which demonstrate faith that the system can work, if properly led. Martin Luther King, on the other hand, was quite the dreamer, a man who bore the weight of his conviction outwardly, in opposition to the status quo, confronting the laziness and complacency in us that lets evil thrive. Atop the nation's largest employer, bureaucratic talent is needed, but so is leadership, which must contain an element of vision-casting, or the promotion of shared goals for the benefit of all both inside and outside the enterprise.

Obama's Cabinet choices hint at solidarity with insiders with close ties to vested corporate interests. I don't think Obama can fully trust anyone from the Washington establishment, but these people he believes are the best way to achieve change. Jimmy Carter brought in outsiders, and they took months just to figure out their jobs, so I guess there's a role for Establishment insiders to play in orchestrating any potential changes.

In my essay, "Road to change goes through Washington", I argued that Obama's election by itself would not bring change. It will take ongoing action--direct intervention by the people--to correct the situation we find ourselves in. Progressives will need to work hard to make sure that Obama's vision is being implemented. The act of voting for Obama, or even attending the inauguration and enthusiastically supporting him, won't be sufficient to achieve change.

If people falsely assume that Obama's election will remedy the problems of the present age--or at least those aspects of it that Obama seeks to change--, they will be sadly disappointed. Much has been said how Obama is just a man, and we can't expect him to change the world.

You may have heard the expression, "all politics are local." The idea is that politics matter most where they affect you the most. Obama's decision to close Guantanamo might make no direct impact on your life whatsoever. Nor would pulling out of Iraq, unless you had someone you cared about over there. Unfortunately, people tend to ignore any consequence unless it affects them personally and directly.

What happens in Washington therefore is unlikely to impact you as much as a hike in local property taxes, for instance. The local side of politics is what matters most. Still, what we now have is trickle-down impact from national policies impacting the local layer. With our economy so vulnerable, what's done in Washington will impact us on a local level--not necessarily directly but in the form of jobs lost to outsourcing, or in the value of our retirement accounts, which translates to a lower future standard of living.

State governments are ailing, so much so that California is issuing IOUs in lieu of money, a practice that differs little from Federl Reserve Notes, except that the California IOUs are dependent exclusively on that state's future tax revenues. Now if state governments could deficit finance, or issue their own money like they did early in our nation's history, they'd be a lot less concerned about their fiscal positions--just like our federal goverment. But many are forced by statute to balance their budget, or should be.

It's taken years for war in Iraq to make a domestic impact, but it's undeniably raised the costs of borrowing for the private sector. The more the government borrows, the less reason to take higher risks in the private debt markets.

Government debt offers a "virtually risk-free" premium over debt issued by companies that lack the ability to tax. So as trillions in debt head to the markets, the returns on government debt should be less attractive considering the higher yields on private sector debt. Being riskier, private sector debt isn't as desirable, so we have a speculative bubble growing in the market for Treasuries.

Spending on the war is exacting a tremendous opportunity cost. We've entered into the future already. What may have been years ago a problem for others to deal with has become a limitation on how much our government can continue to borrow now. After all, the future is the sum of our past behaviors. If we've borrowed recklessly in the recent past, we (us as individuals or our government) will be less able to borrow now. If we'd been spending to counter a real threat, or on a bailout that was working, that'd be different but the exception to fiscal restraint has become the norm.

I'm no expert in financial matters, but the changes that have arrived at our doorstep have long been in the making. They won't likely be cured, or remedied in any brief time span. The elaborate solutions needed will test Obama's skills, "mad" though they might be. He'll have to cope with the well-funded causes that inundate the Washington establishment.

Every little constituency will need to be fed, less it grow angry and revolt against his leadership, throwing obstacles in the path of change. Yet if Obama can't cut one greedy recipient of federal funds off, he'll be forced to limit his spending sooner or later (unless of course borrowing to infinity is possible.) And whoever gets cut off first will complain that they're being abandoned.

Yes, we can throw large sums of money at the current economic dilemma but it's all borrowed money. Too much borrowing got us into this mess to begin with. More lending equals more growth; a formula that can only lead to runaway debt and a depreciating dollar.

Necessity for change

We can only hope that Obama 's Presidency will bring changes to the way our government does things. Yes, there will be positive changes, and great things accomplished, but the choice of Presidents is no panacea for our economic difficulties--he's just a man. Unless we eliminate the fundamental causes of our failures, they are doomed to cause continuing problems. Until we find effective solutions, that don't mortgage the fiscal health of our children, we are simply passing on the mistakes of the past, in order to avoid the errors of the present.

Nowhere is the need for change more apparent than in our financial system. The consequences of the relaxation of regulations under Bush and the GOP is just now beginning to make its full impact. Capitalism gone wild and the greed of the Bush years degenerated into a free-for-all where the rich made all the rules, and managed to amass great fortunes courtesy regressive changes to the tax code.

The people responsible for oversight and capable of exercising restraint didn't; there was simply too much cash available for the taking. Players in the mortgage-backed securities market like Henry Paulson, head of Goldman Sachs at the time, made massive profits repackaging, selling, and insuring SIVs (structured investment vehicles.) During the regulatory lapse, investment banking profits soared, and with them compensation for CEO's in the industry, with Paulson amassing over a half billion dollars of personal wealth. That culture of greed persists and imperils the role of the financial sector in helping engineer a recovery. The cancer must be purged.

Now we have the "time to look forward" spiel. This approach seems to vindicate the all-too-common American practice of tossing any bad memories into the Memory Hole. This may be our favorite method for coping with previous mistakes: forget them and move on. Well, the methodology for moving forward requires that we must reexamine on a fundamental level what we've done wrong, and correct it, before the consequences do even more harm.

If we're going to ignore the past, it could come at considerable expense to our future and our children's future. It won't be enough to spend our way out of this economic downturn. We simply can't borrow like we have, nor can our government. Until we limit how much borrowing our government does, we won't be able to rectify the deteriorating credit environment. And unless we're willing to accept that a contraction is important, and necessary step, we're bound to perpetuate the problems we now face, or delay them.

Natural, cyclical swing

Progressive are a sympathetic lot, and quickly lean towards easing the pain of those who suffer. Clearly, the lower rungs of the economic ladder suffer most. Still, we need to steel ourselves to the reality that our economy is global, and jobs are disappearing, and we'll need to do things differently to embrace the future.

Simply put, people who aren't able to rebuild their skills and adjust to the fluctuations of the labor market will go without work. And until corporations are made to provide health care for their workers, they won't. It's the job of a business to get away with paying its people less, and the job of a union to help less skilled workers retain jobs and benefits. Government has a role to play, which it hasn't, making the lives of ordinary Americans mired in the service economy impossible.

Our standard of living has fallen and social mobility stalled. We need to change that, and we can't do it overnight. We need more education, and more value from it. We need to bring workers up to speed now to work in the post-industrial economy. Quite simply we're falling behind. Not for incalculable reasons, but very specific ones: free trade and a lack of single payer health care.

Now we need to be careful with protectionism. At the beginning of the Great Depression, Congress passed the Smoot-Hartley Act which "protected" domestic industries damaged by foreign competition. Such legislation passed today would be harmful, although I suppose we need to demand fair trade, so we can have a level playing field. With the US the ONLY developed county without government-sponsored health care, you could argue our companies have an unfair disadvantage. How big of one? $1,500 per car produced, I've heard, a pretty big disadvantage.

Economic crises can't be separated from their cause. We can't find a solution by avoiding a cause--what's done is done. Now we can and should avoid a similar cause in the future, lest the same conditions lead to another crisis. Unfortunately the bulk of Americans have so little knowledge of economics they are bound to let the same unraveling of regulations and absence of regulatory oversight lead to an excess, a bubble.

Americans' capacity to remember is limited, so let me refresh you. The Depression had its predecessor, the Roaring Twenties. Stock prices surged, based largely on margin borrowing--the practice of borrowing to speculate, a practice great for boom times but doomed to one day generate massive margin calls, which in turn lead to a unwinding of positions based on borrowed money.

History repeats itself, particularly when long-term memory fails so utterly, as it tends to do here (remember the "no ground wars in Asia" pledge after Vietnam?) The proportion of stock purchases based on margin loans wouldn't climb until 2007 or so, when the high-flying speculation bubble in commodities encouraged hedge funds and everyone who could to borrow at ridiculously low rates of interest.

Leveraging, as it's called, inflated to some forty times equity, after the Commodities Futures Modernization Act was passed in 2000. See Jim Moore's explanation here on HuffPo. The huge reduction in margin requirements made borrowing easy for speculators.

With greatly diminished regulatory restraints, speculators were free to pursue maximum returns using borrowed money. As long as the regulators didn't clamp down, or access to borrowing dry up, the markets were likely to go up with so much capital infusing them. This positive effect contributed to a rally in the the commodites markets, just as excess borrowing had done in the high flying tech stock market bubble in 2000-1, a phenomena which led Greenspan to term the phrase "irrational exuberance."

If the standards for housing loans had been tightened, we wouldn't have so many foreclosures now. But the Fed and Bush had sought to increase home ownership--an objective which could be better described as increasing lending for home loans, something the banks wanted, as well as the mortgage brokers and real estate construction people. Those groups are now paying the price for the poltical favortism they held during the Bush years, a sort of payback courtesy the free hand of the markets. Loaning too much and building excess supply decimates prices and we've seen a housing collapse that may well continue.

Ultra-low interest rates offered by the Federal Reserve allowed the crisis to happen. Inadequate oversight of home lenders was a gross dereliction of federal responsibilities to regulate home lenders; the lapse was so severe as to cause former Governor of New York Elliot Spitzer to sue the federal government, just before his outing.

On the consumer side, Americans splurged, times were good, so good in fact that no one probably paid much attention to who was going to pay for it all. The party had to end sometime. It has. And nothing Obama can do will be able to put Humpty Dumpty back together again.

An article on atheoblog offers a good rundown on Labor and Commerce Department. It offers these rays of gloomy figures:
"The eroding economic position of US consumers is reflected, paradoxically, in an increase in the savings rate, according to recent data. In the third quarter of 2008, household indebtedness decreased for the first time since the Federal Reserve began to compile statistics on household savings in 1952, while total consumer spending declined for the first time in 17 years."

I'm not going to tell you that this has a good side to it, like Dennis Kneale might on CNBC, but Americans are changing the over-borrowing habits that kept spending high. Cheap money policies by the Fed and rising housing prices created the conditions that allowed the bubble; unprecedented household borrowing gave consumers the money to spend. The collapse of the housing market has brought spending into line, at the cost of economic growth. I guess this is the yin, when we've been all yang up to a few years ago.

I'd argue the benefit of this contraction is the higher savings rate. Americans have been borrowing too much and spending much. Any prognosis that we're in a Depression needs to be tempered by the reality that our previous growth rates were unsustainable.

Industries like construction and mortgage lending are themselves in mini-Depressions, especially if you happen to own or work in those sectors. If you have a family, a house payment, and climbing insurance costs, you're likely to want a bailout just for yourself. Hard working, and victimized by events beyond your control, you clearly deserve one. Still, much of the government's access to credit has been tapped. As it turns out the banks were in line waiting for their bailout long before you got there. They've emptied the shelves, drained the government teat, leaving you and your family with that much less.

Obama's stimulus package will need to stimulate the economy enough to pull us out of the recession. At a minimum, it will need to keep the recession from worsening.

Don't count on any relief--what comes will be directed towards specific industries. Maybe, if you're lucky, someone in faraway Washington will hear your faint calls of distress (or those of your ailing employer) before you end up homeless.

Frankly, anyone could be better at listening than Bush. But Bush had a good time economy rolling, so the jobs were always there and the economy held up, albeit on borrowed time. He didn't need to listen, or respond and when he lied, people were enjoying the benefits of a "fundamentally strong" economy back in 2004. Not true for the economic backdrop in which you, and Obama, finds yourselves, alongside me.

Federal debt has been piled on high, long since given to war contractors like Halliburton, and consumed by banks and big corporations, who've had legions of K street lobbyists to protect their interests. You aren't as lucky, or as rich, so I wouldn't expect much of anything from our government. Bush's legacy appears to be the YOYO--Your On Your Own--world that he helped create.

What isn't working, won't

I'm not going to try and diminish the severity of the crisis, though I do protest the immediacy of the reaction--"pass the stimulus now, or else!" I've been reading several good articles critical of the anti-stimulus crowd (Mike Whitney's term) of which I suppose I'm a member, including Dean Baker's, which Whitney brings up and I cited in my last post.

I'm also a progressive, so I do take offense when I'm lumped in with conservatives who oppose the plan. I'm a fiscal conservative and that has nothing to do with political conservatism. Can't we just drop the labels entirely?

I agree something needs to be done now that the damage done by the regulatory abandonment has occurred. We can't ignore the massive layoffs, although that would make Bush proud. I also can't ignore the investor class, which has made runaway profits on the back of the American worker. So when I hear about how we need this or that, I'm understandably suspicious of the motives--just who has the President's ear? Who is determining who gets what?

T.A.R.P. was badly designed and lacks transparency, so we don't know just who is getting how much. Maybe that will fade with the departure of the Bush junta, whom I fear is trying to squeeze all it can out of the Treasury before it bails.

The convulted process of calling on the second tranche for an additional $350 billion I still can't understand. Apparently the President must veto a resolution by Congress to approve the funds for distribution. Still, as I said, Barney Frank and others on the Hill are apparently demanding better rules and a more orderly processing of disbursements--with more demands on the big corporate borrowers.

This from a Congressional panel convened to find out just what's happened to the $350 billion first installment of the massive bailout, courtesy truthout.org:
"The Panel still does not know what the banks are doing with taxpayer money." Can't get more blunt than that. The Executive Summary continues:
"Treasury’s strategy appears to involve allocating the majority of the $700 billion to 'healthy banks,' banks that have been assessed by their regulators as viable without federal assistance."
The banks actually bought regional banks, shrinking free market competition. With impunity, they issued multi-million dollar bonuses to top executives with our money. Absent any numbers, we must assume that very little to none has been loaned out to consumers, for housing loans, or to buy stuff.
"...the marketplace assesses the assets of some banks well below Treasury’s assessment..."

In other words the Treasury paid too much for what they got. If they'd let those debt securities depreciate in the open market, they could have intervened much more effectively, and got more for their 'investment.' But maybe the whole TARP intervention has been about NOT getting the most out of the public loans, but rather the opposite--how to give the banks the most they can, at term the least beneficial to the public. The people running the Treasury department are investment bankers--still--so who's best interest do they represent?

The report's Executive Summary goes on to say that the purchasing of bank assets might not help "restore stability and confidence." The funds aren't being used to prevent foreclosures, or stabilize the collapsing housing market. The Treasury Department is unwilling and/or unable to explain how the TARP program is meant to work or what it will achieve in its current form.

See the video of the House Financial Services Committee. If TARP is progress, I'm skeptical of whatever Act Two will bring.


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Saturday, January 10, 2009

Stimulus not a solution

Obama is not yet President, but he's learned well from his predecessor the political expediency of peddling fear. Yesterday, in Fairfax, VIrginia, Obama spelled out catastrophe if his stimulus bill weren't passed. We were told we could expect double digit unemployment, that things would get worse economically. Bigger government is the cure.

Scarily, last night I found myself agreeing with Fox's Sean Hannity on the absence of any fiscal restraint in Obama's package. As a fiscal conservative, I just can't believe the stimulus funds will be spent in a way that will prevent a crisis--it can only alleviate, or defer the crisis until some later point.

Before long, though, Hannity's call for lower taxes helped me come to my senses. Republicans constantly blather about the economic benefits of lower taxation; in my opinion, taxes that aren't paid simply mean someone else must pay for them, a highly selfish proposition. If Bush's tax cuts were so great, why do we now find ourselves hurting so badly?

Whenever you hear the call for lower taxes, substitute the phrase "deferred taxes" and you'll get much nearer the truth that every bit of taxes we don't pay becomes debt. As long as we spend recklessly--a condition that Republican rule for years has only worsened, tax reductions deprive future Americans of the fruits of their labor. They will never receive the benefits of the spending, but will inherit the cost, in the form of federal debt they must pay off.

Every dollar borrowed now incurs a stream of revenue to service the debt, one which can only be paid by 1) taxes or 2) inflation, which in fact punishes savers by cheapening the burden of debt. Inflation has particularly nasty effect on those of us who work, and must rely on a salary, which rarely keeps up with inflation.

Obama's stimulus package would put us on track to run trillion dollar-plus deficits for years, a fact that many liberals have no issue with. Mark Weisbrot, writing for McClatchy, compares the size of Obama's proposed stimulus package, comparing it to Reagan's: "A trillion-dollar deficit would be about 6.7 percent of GDP. In 1983, coming out of our last deep recession, President Reagan ran a deficit of 6 percent of GDP."

One difference Weisbrot doesn't mention: our deficit was under a trillion dollars or so when Reagan, the much vaunted fiscal conservative, launched a federal spending plan that would make a liberal blush. Since Reagan, the deficit has zoomed ten fold, now to over $11 trillion, not including all the future liabilities incurred by raiding Social Security trust fund, future bailouts of Freddie and Fannie, unfunded pensions, health care costs, etc.. The $11 trillion doesn't include the recent bailout for the banks, nor any of the Federal Reserve new programs at its lending windows, where it swapped bad debt for our good Treasuries, nor any of the Freddie/Fannie bailout.

Contrary to his reputation, Reagan got the US out of a severe recessionary period at the beginning of his administration by spending borrowed federal money. Deficits grew huge, although as a percentage of GDP higher deficits had come during the Fifties. Deficit spending gets underplayed by conservatives in the media when our government spends on things that conservatives believed in: defeating the Communists and our war machine. I didn't hear much of a whimper about the costs of Bush's War on Terror while the Republicans were in charge; it's only now with Obama's stimulus package that excessive borrowing is a problem.

Weisbrot does mention the impact of the wars in Iraq and Afghanistan on the current budget. One comparison to the past does hold similar in past and present--spending does heavily revolve around the American military machine. Reagan did pump money into the defense establishment as has Bush.

If total expenditures were broken down, and the costs of administrating veteran's health benefits, retirement, and all the associated costs of staffing, supplying, and sustaining our military assessed, they would consume over ONE-HALF the budget.
Now if our government were spending less money on wars of indeterminate length, questionable winnability, and unclear cause, I guess I'd be a little more convinced that our collective defense were really at risk lest, God forbid, the Russians or some Arab heathen come and kill us all. These scare tactics that predate Obama's push for his stimulus.

The reappearance of scare tactics gives me one reason to be skeptical when I hear about how we must act now, to deal with this "unprecedented" crisis. Like the boy who called wolf, I've simply grown numb to the constant fear-casting. Jaded now to the post 9/11 fear trigger, the population might take the economy more seriously as a direct threat, though the technique is old.

It might not be so bad if government spending was being spent on something valuable. I gain nothing from an extra gun sold to the Afghan regime, though I guess someone somewhere is grateful for the job making that gun. Nor do sugar subsidies, or much of what the government spends their money on, benefit me. I've been unemployed and never got nothin' from them, nor do I suspect that I ever will, until Medicare kicks in (which it may not be, judging by the cost of health care and dwindling resources of our government.)

Despite the questionable effectiveness and deficit busting cost, support for a massive, immediate stimulus package is strong among leading economists on the Left. I guess this is their opportunity to practice some Keynesian-style spending.
Dean Baker's article blasts the Republicans for obstructing passage of the stimulus, as if the deficits weren't an issue at all. Baker lumps all critics of the bailout together with the Republicans: "we should realize that the main concern of some of those opposed to stimulus may not be that it will fail, but rather that it will succeed." I for one don't have to support the plan and my reasons have nothing to do with politics.

More calls to action echo through the blogosphere. Here a blog post by Robert Reich, Secretary of Labor under Clinton:
"Overall, the federal government's responsibility for restoring aggregate demand is at least as great - arguably, far greater - than its responsibility for rescuing the financial system and helping U.S. automakers restructure. Without adequate demand, credit markets will continue to be frozen and major American industries will languish. Yet there is no ready formula for how the federal government should proceed because we have not been here before."

Maybe all Reich's appearances on CNBC's "Kudlow and Company" have started to get to his head. At the end of his show, Kudlow makes all his guests recite a "capitalism is great" mantra-- a spell which may have caused Reich to abandon all reason and join in with them.

Still, Reich is a smart guy and must know the situation out there. That's why his opinion counts. But he's also had enough time out of government to worry about his next job, and how much his foundation can pull in. Reich's personal success is intimately linked to the status quo. Reich--like everyone else--probably has no desire to see the value of his 401(k) tank as it likely will. Containing the damage to corporate profitability is more likely more of a motive than any altruistic reason for all the Keynesianism.
Back to Reich's statement: When government stimulates demand, it's basically spending. Money is either offered directly to corporations or to consumers. Increased demand provides benefits, but there are some serious issues. First, the government is not returning our money to us. Because we've entered an age of chronic deficit financing, the money government spends is actually debt.

Another problem in our money system is that debt is money, so the more debt you accumulate, the richer you are. Shouldn't it be the other way? The wealthier you are, the less of someone's debt you should own. But our system is backwards, Federal Reserve Notes are IOUs, and therefore our entire monetary system depends on the Fed issuing MORE debt in order to keep from collapsing (or is it to keep profits from slowing?).

The Federal Reserve Note presents what's known as a systemic risk. We can't avoid the consequences of a blowup in our money supply. Every dollar of debt issued by our Treasury increases the supply of money out there. Because the Treasury doesn't distribute money directly--instead relying on the Fed--it must incur debt through the issuance of Treasury bonds and bills. Issuing money, the Federal Reserve gets the bonds in return, which it can sell or hold, at which point it receives the interest.

In exchange for giving this extremely nice, tax-free (yes, that's right the Federal Reserve is actually a PRIVATE company, the only for-profit company that is free of any taxation) perk to the nice bankers--who directly contributed to the crisis and are hesitant to lend, slowing the recovery--we give our taxes to the Fed. That's right, not only does the Fed exchange Treasuries (our public IOUs) for its Federal Reserve Notes--IOUs from the Fed costing the Bureau of Engraving a cent a bill--it also receives all your taxes. That's right, the taxes you pay to the Treasury actually are routed through and received by the various district branches Federal Reserve Banks (which in fact aren't federal at all, or at least no more Federal than Federal Express.)

It shouldn't surprise you that the Internal Revenue Service was created the same time as the Federal Reserve. Taxation props up the system. Taxation is a power of government, so tranferring tax revenue shows there is a special relationship between our government and the Federal Reserve.

Without real money flowing in (money for which time and effort was exchanged as opposed to simple interest and investing), the Federal Reserve Notes would be nothing more than pretty pieces of paper. Government trades its power to tax, alongside its bonds and Treasuries, to the private, for-profit Fed in exchange for the tax revenue it produces, including the right of future taxation. In essence this is saying that the Fed will be able to receive future taxes granted the government. The federal government's exclusive right to tax therefore becomes a marketable commodity, and backs up any borrowing our government does.

Taxes can be sold ("monetized") and borrowed against. In some ways this is no different from selling a mortgage: except government debt carries a presumption that it will always be able to tax the people to cover the interest and repayment of principal. Unlike a mortgage, where the debt may never be repaid or foreclosure happen, the federal government offers a "full faith guarantee" which is in fact a pledge to tax to pay off creditors. This promise makes repayment of all its debt as certain as possible, at least compared to other borrowers who lack that privilege.

Any investor knows that US-government issued debt is considered the safest. The reason is that government can typically just print up the money, or raise taxes, to cover the cost of interest.

Precedents for insolvency

Looking back at historical periods, like the Wiemar Republic in Germany after World War I, governments have in the recent past found themselves unable to pay back what they owe. During crises, governments may find themselves unable to attract foreign creditors and unable to pay off large debts. Potential investors in their bonds--from abroad and within the country--feared for the loss of principal as the size of the debts were so high.

As the Wiemar Republic couldn't repay is debts with new capital or foreign exchange reserves--sound familiar?--it was forced to issue more debt at higher rates of interest. Government bonds ended up having to pay more and more interest to entice investors.

Eventually, when investment from the private sector dried up, the German government resorted to devaluing its currency--issuing huge-denomination bank notes and bonds--a situation called hyper-inflation, where interest rates spiral up so fast that the money loses its value almost as fast as it's printed. The net result is that the old debts become easily to repay (with the the just-printed currency notes replacing older, rapidly devaluating ones.) Unfortunately, under the Treaty of Versailles the Germans had been forced to pay reparations in gold, which meant they couldn't print themselves out of the problem.
Many nations have had to choose between inflation and preserving the power of their currency. Typically, the worse the crisis, the less concerned with the preserving the purchasing power of the currency--by not overissuing it--the government becomes.

Now I wouldn't have said massive borrowing were a crisis if we were facing a major war or Depression. But the numbers simply don't back that assumption--yet. I have heard that one reason the Depression didn't end more quickly was that the Federal government was too slow to act. OK, so lesson learned, if we're in a Depression, we'll do more. But we aren't in a Depression.
Can government spending stop a Depression? Could throwing huge sums of borrowed money head off a Depression? I don't know. Maybe things will get worse. But I remain wholly unimpressed by the ravings of economists who claim that we should do more of what we are doing now.

The lead-in to the Depression which they all studied in depth was a different time. Certainly we're not quite there yet. I don't want to see a Depression, but I don't know if throwing more money around will prevent the economic issues we will supposedly face, or merely delay its inevitable appearance.

Must government level out any unemployment? Employment is not the province of the State. A government job will decrease unemployment, but it doesn't create an increase in economic activity like a private sector job. Worse, the government job drains tax revenue, which represents the removal of wealth from taxpayers to the government (or worse, in the present deficit financing environment, a future debt to be paid off, with interest, by future Americans, many unborn.)

Technically, any job created buy the bailout is temporary, and created not by the market but rather an artificial source. Now of course we need government jobs, government fulfills numerous functions that people need, although many federal jobs (including virtually all those tied to "defense" if you're a dove like me) aren't really needed.

The act of job creation through federal spending doesn't contribute to real direct economic growth, but the added income does generate demand. The act of creating that government job represents deferred taxation, which means all the benefits of that job will go to people alive, here, now whereas the responsibility for paying for that job will go to taxpayers of the future. This is obviously a heckuva lot better deal for people here and now than it is for our children, born and unborn. Perfect for the Baby Boomers but hardly a good deal for their grandkids.

Whatever good the stimulus does becomes a net liability for our long-term future. Every dollar borrowed now also represents a dollar that might not be there in the future. The delay between when we issue debt and the price of paying off that debt seem to be closing every day.

Eventually, the interest payment on the debt will make even higher taxation a necessity. Again, this is because the fiat money system we have treats debt as money--in order to have more money, we must lend more. To lend more, someone must borrow, whether it is the government itself through sales of its Treasuries, or companies that get loans--the ailing private sector.

Basing our government and our monetary system on lending makes a perfect system for the banks, who actually created the Federal Reserve Banking system, but not so great for everyone who has to borrow. Fractional reserve banking is the equivalent of over-leveraging, like the investment banks did, that triggered this crisis. Banks need only keep on deposit one-tenth of what they lend out.

Granting control over our monetary system to the Federal Reserve has allowed this crisis to occur (alongside a whole lot of deregulation.) It's a wholly preventable tragedy. Our government had to see this crisis coming, with too-low interest rates allowing a huge bubble to grow in the housing market.

Eventually so much lending--money--entering the system means that more and more interest will be paid, which slows economic activity. Also, we have the serious emergence of monetary inflation, which is too many dollars in circulation. Now price inflation is measured in the changes to a set basket of goods over time; it's been falling as aggregate demand has fallen.

Of the two, far more ominous is monetary inflation because while dollars have been issued, most have yet to hit circulation. They end up in Saudi vaults, exchanged perhaps for billions in military hardware languishing in the desert, or squandered by bankers (which actually helps reduce inflation), or simply goes to the Chinese, who use it to own more and more of our public debt through sovereign wealth funds. As long as all those trillions stay outside the country, we'll get the benefits of selling what are essentially worthless pieces of paper abroad without seeing prices rise much at home. Eventually, through global trade a correction will be forced, although with the dollar still retaining a place as the world's reserve currency, dollars will continue to be used abroad, a nice perk which has yet to be unseated by the Euro.

International trade isn't my focus here, but I am starting to pay attention to how the dollar is valued, largely as a part of my interest in commodities speculation. Rising commodity prices are a sign that the dollar is weakening, that perhaps too many American IOUs have been issued, and that they can buy less real things: like coal, gold, or oil. So the commodities bubble may be less of a bubble and more a warning that the dollar's purchasing power has eroded. Rising oil prices could be the product not of more expensive oil--although Bush's tenure and wars in the Middle East have helped generate geopolitical instability contributing to costlier oil--but rather a declining dollar.

Whatever happens as the result of economic issues could be tame compared to the impact of a dollar worth less--or potentially worthless.

The current crisis could be far worse if private capital dries up. If lenders won't lend, economic activity slows. If government can't borrow--as one day it will be unable to do--it will simply have to print and issue money directly, which would break the Federal Reserve's control over our financial system. Hyperinflation will be the likely outcome.


The first round of Paulson's bailout tried to buy toxic debt securities, then it resorted to just giving the banks money. To whom we don't know, nor exactly how much, though we do see 5 billion here and 6 billion there for all the treasured icons of American business who've been suffering. Barney Frank is demanding more transparency in how the TARP funds are spent, but I'm guessing we'll be well into Obama's term of office when the books get brought out and all the facts get revealed.

The price of not releasing enough money has been made clear in the crisis of immediacy that economic gurus, even on the Left, have been telling us that we must resolve now. We hear that the crisis is unprecedented. In the perception management business, it's impossible to know just who is telling us the truth, and how much is marketing spin meant to sell a stimulus package which benefits specific corporate interests.

The current crisis has taken on all the dimensions of a crisis, yet the economy has just begun to slow. [Editor's note: BlueTigress of smirkingchimp disagreed--it has been going on for a while.] Corporate profits have slowed because consumer activity has slowed. Government could be doing a lot more to stimulate lending by the private sector, but has instead chosen to funnel huge sums to distressed corporations.

We shouldn't keep obsolete industries afloat. And if the destruction of those industries is due to foreign competition, we should reevaluate just how fair our free trade agreements are, particularly if losing those industries is politically untenable.
Wasn't a burst of that bubble not only inevitable but, dare I say it, necessary? Isn't slowing economic growth the only reasonable way to end a period of excess growth? The economy will change, and cause a great deal of pain for middle class Americans--this is a pre-requisite condition for change.

Now if a consumer (yes that's an apt description of what citizens have become in our society of hyper-consumerism) looks back and says, "oh, this is horrible, we're not making as much money as we used to," that's a bad situation. But do we really have a crisis when a corporate citizen says, "ewww, our profits are down by half..."?

Judging by the reaction to the plight of the corporate citizen, our government has prioritized assistance to corporations over assistance to the needy public. This should come as no surprise considering the political climate in Washington has for years favored the corporate interest over the public. The tentacles of the Right-wing thought machine have reached down to affect the minds of millions, who are convinced whatever hardship people face is a product of their own laziness or inadequacies.

Nestled in the seat of power, this Ayn Randian perspective has colored all that our government does. Spearheaded by the GOP, but not exclusively theirs, the acquiescence of government and the media to corporate control encourages careless indifference to the needs of the already poor. Social spending programs have been mocked, and Katrina showed just how little those at the top care, at least when the cameras aren't rolling.

With talk of a massive stimulus bill, highly paid media consultants and lobbyists are drooling at the chance to market their corporate sponsors as the neediest recipient, the most desperate of the desperate.

It's all just a question of priorities, or issues, of interests, which never seem to change no matter which party takes over. How far do you think your Congressman will go to protect you, if it comes down to the last dollar left in the public treasury? He'll protect himself first, which means reelection, which means attracting the most money for his reelection campaign.
Obama's campaign did show that millions of people giving--predominantly through the internet--can make a huge difference. But it also showed that money is still king of our political process because Obama's $700 million war chest contributed to his victory.

The system will change little unless the incumbents in Washington--who make up the rules--happen to one day get so confused as to pass a law which actually decreases the chance of incumbents losing their election. Incumbents tend to have large war chests than their challengers, so any serious effort to de-monetize the political system, with its patronage, perks, lobbying, etc., is doomed to fail.

The people will suffer from economic changes more than corporations, which lack both heart and soul. The health of the corporate citizen apparently has more worth than the public citizen, despite the fact that corporate citizens provide very little social capital. It exists to accumulate monetary capital, has no purpose other than to enrich its owners.

Corporations are not created to help society, only to make more money with each passing year. In the constant lust for more
profit comes much of the wrongdoing in the world, everything from mountaintop removal, the mass marketing of submission and comply weapons like the Tazer and Active Denial System (now in rifle form!) to the distribution of military hardware in hotspots through the world.

It's no coincidence that Iraq and Afghanistan are now among the largest purchaser of Americans weapons. We've created a market there by destabilizing the countries: a process that began with regime change and has only blossomed as the wars-of-choice drag on year after year. The additional weapon sales only generate more misery, encouraging an ongoing cycle of murder and revenge. Look no farther than the situation in Gaza.


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Friday, January 02, 2009

Economy can't be bailed out

We enter 2009 with the country in disarray. The Bush Presidency clings on, content to revel in the messes of its making until it's finally, permanently, driven back to Texas.

In the long days that mark the transition in Presidential authority we've seen the worst cronyism, least respect for environmental laws, and the most egregious abuses of power.

Bush has "burrowed" his political appointees into key positions, turning them into career federal employees in order to avoid their termination with the new administration. A proposed 12th hour fire sale of public lands in Utah was stopped at the last minute. Also, Bush ordered the EPA to relax toxic emissions requirements, breaking decades-old standards for toxins in our air, water, and soil.

Each of these actions intends to thwart the intentions of the new President, which will be to use federal departments as they've been intended, not as proxies for business interests. The intention of neutering regulatory authorities has been to maximize industrial profits, however great the long-term cost to our health, economy, or natural heritage.

The Securities and Exchange Commission has brought the nation's financial system to its knees not by overzealous prosecutions, or onerous regulations, but rather by the lack thereof. The constant pandering to various special interest groups has left the markets in a state of shock. Deregulation, which was supposedly good for all of us, turned out to be little more than a method for the wealthy to get wealthier, for the Bernie Madoffs of the world to get away with it.

At over $50 billion, the costs of Madoff's pyramid scheme will be but a tiny fraction of the cost of reestablishing functional credit markets. The latter expense we have no way to know. So far, the Fed and Treasury have been content to throw huge sums at the problem, by giving federal money to the banks.

Bottom line: the banks aren't lending near as much and for good reason: they need to make a profit. The cost structure remains expensive, and banks have doled out billions in bonuses, a habit they've apparently absorbed from their reinvention as high-flying investment banks, a mindset that appears largely unaffected by the so-called credit crisis.

Maybe those that benefit under the present system have become so out-of-touch that they're unwilling to confront the consequences of their unadulterated greed. The ultra-rich may be content to flee any time to their walled compounds and off-shore tax havens, where they've most certainly built up vast fortunes exporting America's once-proud industrial base.

Accountability has been sadly lacking, as has any sense of ethics that might restrain greed. Greed has instead been enshrined, worshipped like a god. All the good things that are supposed to come out of deregulation never emerged; the losses socialized as the profits are privatized, as Nouriel Roubini says.

Greed is at the root of the problem, Jay Bookman writes in the Atlanta J-C:
"Left unchecked, greed overwhelms any sense of proportion, fairness or morality. We as a culture and as individuals came to believe that if greed is the engine that drives progress, any attempt to curtail greed thus curtails progress. We thought that since greed is good, unrestrained greed must be an unrestrained good."

Laws have been created for good reason: to restrain the lower nature of man. Unbound by any civil or criminal restraints, the capitalist system shows just how inequitable it is. For those without jobs, or savings, it's as if we were back in the Depression for all practical purposes. The ruling elite should recognize capitalism's failings as the threat they are to the status quo. Instead, so greedy are those at the top,they scramble for the exits, not caring what comes after, or what happens to The Others.

After eight years of BMC'ing (Bitch-Moan-Complain) about Bush, it's become quite easy to dismiss more problems. The culture of denial has persisted for years, so it's become natural to deny the scope of the problems left behind, or to underestimate the true scale of the leadership failure and cleanup required. At a certain point, most Americans simply lack the capacity to understand all the problems that Bush's incompetence has created, especially once they've been magnified by the callous indifference to legal and regulatory authority, which under Bush have become instruments to further narrow interests rather than an objective, final arbitrator which could limit Presidential authority.

With so much of what Bush has accomplished to find fault with, complaints about huge deficits can easily be thrown in the scrap heap of history--if they could only be. The taxpayer or, to be more accurate, their children are left to face the consequences of massive deficit financing.

Unlike the regulatory environment which can be rebuilt, or the confidence lost refound, the debt persists. And each day that goes by, more debt is added to this pile, to the point that more interest must be paid--not only on the existing debt, but that which we incur in order to pay interest on that debt.

An unsustainable system is exactly that: unsustainable. Our borrowing habits can't last. Even if we want to spend, we at some point in the near future will not be able to borrow. Lacking any capital to borrow, we will have no choice but to print money. This in turn creates a spiral of monetary inflation. The more cash that hits circulation, the less valuable the existing cash becomes.

Now it's possible to increase the amount of money out there and not have prices go up. That phenomena is known as price inflation, a problem that might in fact be more easily rectified than monetary inflation. Also, if our workforce gets more productive, higher wages need not translate into higher prices.

Price inflation can be attributed to higher energy costs, or labor costs. Inflation's been tame largely because of increases in worker productivity. Despite their yeoman's contribution to corporate profits, wages for the bottom half of the American workforce has seen no real increase for decades. Meanwhile the rich--especially the top 1%--have seen their income increase by as much as 14% in one year, 2004.

Only now, with the consequences of unchecked greed so obvious, it's possible that our leaders will make an effort to enforce the laws and regulations that protect the financial system, many of which were created during or in the aftermath of the Great Depression.

Many of the social programs--like Social Security--were created as a direct result of the financial hardships endured during that time. Sadly, the American people seem prone to forgetting the mistakes of the past. I guess it will take severe economic hardship to reinvigorate the regulatory regime, to impose limits on greed.

The next question therefore becomes what can be done, not only to prevent a future collapse, but to escape the consequences of the economic disaster we now find ourselves in. While many of the programs created to provide Americans with a safety net have become important institutions, they've also fostered massive bureaucracies and inefficiencies. Also, a demographic time bomb will explode, as the ratio of workers to retirees is expected to plummet as the Baby Boomers retire and begin to draw down benefits.

Social Security and Medicare are approaching insolvency. The political fighting over privatizing Soc. Sec. and national healthcare are really secondary to the bottom line realities imposed by the budget.

Tax burdens have also crept up on middle classes to the point tax increases simply aren't feasible. This leaves the burden of higher taxes to the rich and corporations, who will clearly wield extraordinary influence in trying to increase government borrowing in lieu of more taxes, taxes that they would have to pay if they were unable to avoid them. Too bad these interests didn't understand that at a certain point, the political pressure to maintain solvency and pay for the costs of government might cause them far greater harm than whatever benefits are brought by lower taxation. We're running out of time: already tax receipts can barely cover the increase in interest created by the addition of trillions in new debt.

By avoiding taxes, the wealthy and corporations have allowed government to bankrupt itself. In time, the investor class may end up having to pay more than their fair share, which they've managed to avoid paying for the most part, especially since the Bush tax cuts. Borrowing has been politically preferable, but cannot continue like it has. At some point tax revenues will have to go up, not imposed on the already overtaxed working classes but the owners of the means of production as well, who enjoyed huge tax benefits and write-offs alongside lower tax rates.

Approach doomed to failure

For any economic non-interventionist, no amount of government meddling can get the private sector to change. Now back in the last Depression, great care was taken to allocate Federal fiscal resources, including stipulations on which mortgages the banks could sell, and methods established in advance to secure repayment of government-financed loans.

No such deliberate, cautious approach exists today. Instead we have a Secretary of the Treasury, very much a creature created by the investment banking sector, directing a messy bailout of unprecedented size with virtually no oversight. No one knows where the TARP money has gone, simply that's it's been spent.

The Presidential transition--in its day perhaps a necessary process requiring ten weeks---has become a major liability in recovering from the crisis. No leadership is in fact worse than bad leadership. The current plan, maligned and flawed though it may be, does show that government is doing something, which can provide a sense of optimism and confidence perhaps. That said, I don't think it will work, and has been sold as something it is not, because a bailout directed for the benefit of corporations and the rich could never be passed by Congress.

Borrowing and lending form the basis of all economic growth in our Brave New Economy. With so little savings, individuals and businesses must turn to the providers of credit. This is why the "credit crisis" is feared: as lending dries up, so too does the "real economy."

To the jaded skeptics of the Austrian school of Economics, who know the central government authority can rarely achieve results, doing something is nothing more than a superficial gesture. Central banks can't create economic activity--they can only make it more likely to happen. Getting the economy rolling requires involvement by private citizens. No Great Leader can mandate that we all start businesses and go out shopping. No central authority has ever managed to re-engineer an economy so it can be controlled out of the capital.

With no control buttons on the economy, all the Fed's stimulative processes can be seen as what they really are: gestures that leave as the sole final outcome a gross devaluation of our currency. Every step to date involves cheapening the price of money--making it easy to borrow.

The Federal Reserve has introduced so much liquidity into our financial system that it's a wonder all that money hasn't caused massive price spikes. Yet consumer prices tumbled last month by the largest drop in decades. By keeping prices, and wages, low for the vast majority of Americans, the Fed believes they can avoid the inflationary spiral.

Another deflationary factor is the destruction of so much stock and home equity. In an interview on CNBC today, Harvard economics professor and National Bureau of Economic Research member Dr. Martin Feldstein estimated the total combined losses--stock and home equity--at $10 trillion.

The losses aren't the same as burning money, but they do represent a massive loss of future spending power, that in turn would have sustained a higher standard of living for millions, as well as more healthy stock markets in the future, which makes borrowing easier in the future.

The decline in home values also doesn't bode well for the future. The habit of cashing in on rising home prices by getting second mortgages became popular during the boom times earlier in the decade. Now all those residential real estate values have plummeted. Millions are upside-down on their mortgages, meaning they owe more than their homes are worth. So why not walk away? Foreclosures have soared.

Callous as it my sound, the misery I anticipate that so many will feel does curtail inflationary trends. With less money around, the government can spend more freely without fearing the inflationary impacts, along the lines of what we saw earlier this year in commodity prices--a natural destination for all those excess dollars.

The destruction of so much equity creates a political incentive to borrow and spend our way out of the problem. Economists will admit potential solutions aren't considered purely on economic realities but rather revolve around the political goals of their politician/appointers, chief among them the desire to get reelected. In his CNBC interview, Feldstein indicated pressure would grow to throw even more money to try to stimulate economic activity.

Economic growth is seen as a necessity worth any cost. The popular will, echoed by the politicians, is to avoid pain now even if it means more pain in future (where it will be someone else's problem--our children's.) The government is seen as the valiant knight rescuing the princess of the distressed economy. Government is thought of as the job creator of last result. This dependency forestalls the chief benefit of economic corrections, which is eliminating inefficiency in the private sector markets for goods and labor.

Pouring in trillions of dollars may stimulate demand but comes at a long-term price, which will include far more limited spending as the result of previous over-borrowing. At some point we will arrive at a cumulation of all our past decisions based on short-term thinking. Have we reached that point now? Possibly. No one can anticipate how our creditors--largely foreigners--will react when we put trillions more in U.S. bonds out for sale.

Government spending displaces private investment. The more federal money that enters the economy, the less private sector borrowing will be needed. Yes the stimulus packages and additional spending will boost the revenue of corporations. But that demand is wholly artificial for the most part, created by temporary infrastructure projects or war. Unless the government can achieve something like a permanent state of war, industries selling to government will eventually lose their contracts.

Outside of health care, government expenditures are largely inferior to private sector activity. This is because government spends recklessly, for political reasons, in what is labelled socialism, but is really big government statism. (In real socialism, workers own the factories.) Government spending follows political priorities that change. And recipients of federal funds also grow extremely inefficient, delivering less and less benefit to the overall economy over time, as more spending is lost to waste. Large businesses with effective lobbying close to the seat of power draw the most government spending, to the exclusion of smaller businesses which ultimately hire far more Americans.

The people clamor for a better economy, then our experts explain how to generate growth. Meanwhile, all along the economy has been saying it's sick, and maybe needs a rest. Instead we plow trillions of our grandchildren's future tax money to prevent the downturn from hurting us. How selfish.

Whatever happened to the time when we didn't need government, when we could depend on ourselves to create jobs and opportunity? Unfortunately the government has stepped in, at least with those industries lucky enough to curry favor from it, and tried to make things better on paper, for now. Meanwhile the structural deficiencies persist--lower educational achievement, diminished entrepreneurial activity, and larger debt burdens ensue. All this to avoid the pain of change, which is a price we must pay now in the present, lest others--our children--have to bear in the future, at a far greater price.

Bailouts proposed today dwarf government spending during the Depression. Feldstein corrected CNBC interviewer Steve Liesman in saying that FDR did not spend so much during the Depression, but rather attempted to regulate various financial functions, what we might today call tweaking. Maybe enough wasn't done fast enough. We don't know whether opening the spending floodgates will work because of the lack of a precedent.

Road to recovery

The way back to better times can come by the tried and true. And government can play a major role. But success really comes down to participation by more people in the economy. And to succeed, we need to adjust our strategy mid-flight, which entails the most uncomfortable process of abandoning that with which we are comfortable, and embracing that with which we are not. Ultimately change revolves around our fiat monetary system, and how we produce, particularly in manufacturing.

The great bull market in the late '80s-'90s expanded the American economy because more people were participating in the stock market. Now, with stock ownership increasingly becoming the province of the wealthy, the overall market malaise may continue. People face inflation far higher than that in the '90s for things like health care and services. It's simply impossible for many people in the bottom four-fifths of our economy to put money aside. Under the current system, and burdened by debt, most must work 'til they die. Already, virtually all couples who can, work.

Over the long term, the impact of inflation comes as the dark side alternative to the power of compound interest, which Einstein called "the most powerful force in the universe." As a dollar of interest begets a dollar of interest that begets...so too does inflation shrink the dollar's true value. Just as an interest rate of 6% will double one's investment in roughly 12 years, so too will an inflation rate of 6% halve the purchasing power over 12 years. Now check your wages over the past 12 years: have they doubled? Most likely not.

If you are in with the majority of Americans, your wages have essentially been declining since 1980 or so. Undoubtedly the loss of more manufacturing jobs will further reduce real wages. And the compound effect of much higher unemployment is lower economic activity and salaries, as people are glad to get what work they can.

These Depression-like statistics mean that most young Americans will inherit a country far weaker economically than that of their parents, and many will never attain the income of their parents once the inflation-adjusted value of their money declines over time.

The fiat money system destroys the value of money. In this respect it's the ultimate tool of class warfare. Those that have the capacity to make more money through investing always emerge better off than those dependent on wages, which never--baring effective collective bargaining and fair trade--grow fast enough.

The minute that the US Congress signed over its right to issue money to the Federal Reserve--a private banking cartel--in 1913, war was declared on the American worker. Since that time, the purchasing power of the dollar has declined by over 96%. Chance? Coincidence? Hardly.

Look now at how the unions have been eviscerated. In an exchange of comments on my last post in smirkingchimp, I went as far as to suggest that the free trade movement has in fact been a method used to destroy collective bargaining and the unions. The latter is probably the only organized progressive political force left in the formerly industrialized portions of our country, the Rust Belt. Without the ability to strike, and force confessions, from employers, workers will face lower pay, benefits, health care, as well as reduced job security.

One of the great tragedies of free trade is the impact it has had on the American worker. Higher unemployment does reduce inflationary pressures, offsetting income gains for the rich, but it will invariably bring a lower quality of life to our country. Employment has been decimated by outsourcing, a process which the federal government has facilitated continuously for decades through its tax policies.

It'll be interesting to see if Obama treats the de-industrialization of America as the problem it is. To do so, he'll be confronting many of the sources of his campaign war chest of unprecedented size--$700 million plus--who come from the investor class, who profited handsomely under Bush. To demand better wages, and health care, Obama will have to side with the unions and against free trade.

Offering national health care might alleviate pressure on manufacturers without forcing employer concessions. Unions do negotiate better wages but aren't the sole determinant of overall costs, despite what the investor class capitalists and their media flacks tell you. It's simply easier and cheaper to make a lot of things abroad. Plus, we here in this country abide by a set of laws and workforce rules that trading partners do not; the playing field is hardly level.

Free trade is meant to help us by allowing us to export rather than to buy more things made abroad for less. Without exporting, we'll never have fair trade and never capitalize on the Theory of Comparative Advantage.

It is possible to keep manufacturing vibrant by improving technology, adopting it to our needs to compete at a higher level--one the Chinese won't be better at. The US needs to lower its cost of production whatever future challenges that will arise. In fact, it's the challenge presented by competition from abroad that should make us better at doing what we do.

A massive stimulative package might boost industrial demand and preserve manufacturing jobs. But the global macroeconomic trend, at least for lower end manufacturing, has been established in favor of foreign producers. US manufacturers need to specialize more on higher-end products. With unrestricted free trade, no amount of stimulus packages will allow us to keep our industrial base without moving to different, more sophisticated models for manufacturing.

Short of any direct action by government to limit foreign competition, the future trend is down for traditional manufacturing. Absent trade restrictions, manufacturing jobs will continue to leave until American workers get better trained and become more efficient.

The US can be competitive. Just look at the Japanese and European automobiles who produce their cars here. These are automobile makers--like Honda here in Greensburg, Indiana--who face the same conditions, yet manage to make more revenue per car. The Japanese model is in a word better than ours; just like the Chinese are apt to make some things better and more cheaply no matter how hard we try. If our auto industry isn't inclined to emulate the Japanese model, they should move into more specialized forms of production--like racing, mechanical, emergency, cargo, aircraft service, military/security vehicles, etc..

Adaptation requires spontaneity and creativity, alongside some good old fashioned initiative. Honda and Toyota saw an opportunity in robotics--the natural progression in the development of assembly line automation. The Japanese were smart enough to realize that their labor costs were high, and the chance of protectionist legislation high, so they started building transplant factories here in the Eighties. (The Greensburg plant came to Indiana just a few years ago, so the trend continues.) Rather than sit around and wait for bailouts, they off-shored. Negative consequences to their own domestic automobile industry were at least partially offset by the move into robotics, a technology they could then export in lieu of automobiles.

Ultimately the success or failure of traditional manufacturing in this country hinges on efficiency. Rather than see labor unions and the collective bargaining challenge they present as the largest obstacle to profitability, those aspects of traditional labor need to be interwoven into the ultimate purpose of corporate activity: to make money doing something better than anyone else can.

Without an educated workforce, we won't be able to maintain a strong manufacturing base. Without manufacturing jobs, income for the lower four quintiles will stagnate. People will have to work in the "service economy."

Without a more educated workforce, the US will be competing with newly industrialized nations, with costs of labor over there a fraction of ours--with or without wage concessions granted to unions here, or over there...yet. The ability of foreign car manufacturers to succeed here demonstrates the potential of improved methods of production. While workers there aren't union, experienced, nor even better educated, they do demonstrate the potential inherent in our workforce.

Eventually labor in China will get more expensive, as ours did, and it may unionize. In time, cars may be easier and cheaper to build back here than abroad. In the meantime, we need to adapt or perish if we are to stay competitive. Of course there are numerous challenges that will appear, unions and free (unfair) trade among them.

We can't subsidize dying industries forever. Perhaps these companies can redesign themselves. Government can help in this capacity, and not only by lowering taxes but rather by organizing and enabling worker buyouts--real socialism. At a minimum we could be making employee-financed takeovers easier. Many of the workers have the most to lose, as well as represent a large body of institutional know-how necessary to improve on their business models, the equivalent of a strong corps of Non-Commissioned Officers that we can't afford to lose. They will need help getting started, which entails a larger role for government in our economy, albeit less of a handout and more of a hand up.

While help for the banks that precipitated the credit crisis is highly debatable, some form of assistance for manufacturers will be necessary to prevent further shock. Unlike the banks, who can be replaced quite easily, especially if they're not performing their duty as lenders, manufacturers are integral to preserving our American way of life. It may in fact become impossible to maintain our free trade agreements if they punish our people--who we must remember are crucial in any equation defining the national interest.

Destruction of the manufacturing base means that the economy will stagnate. Of course there will be the impact of stimulus packages, but I don't know where the money can come from. At some point the Chinese will look at the state of our economy and cut off lending. This will decimate the dollar (precisely the reason they might not stop lending to us--because their stake will lose much of its value, too.) Yet the idea of the Chinese and Japanese blindly and indefinitely keeping their money here, even as our economy rots, just isn't plausible.

And the concept that increasing the size of government, or handing out stimulus checks, will revitalize the economy is horsesh*t. As I said, the economy can't be directed out of Washington--it can only be encouraged or discouraged, kind of like a jockey in a horse race. Even if we could borrow our way to prosperity (something no country has ever been able to do in the modern era), the price would be higher inflation.

As a matter of fact, the increased spending will push forward the day of default for the US government--that day of infamy when the government acknowledges it has no more nor the means to pay what it owes. As with any over-extended borrower, the moment of clarity necessary to forestall such an event will never come, simply because that admission would entail exiting the state of denial that allows us to continue to borrow and sustain our habit.

Instead, the far more palatable technique will be to issue more and more money to pay for stuff. Every dollar that gets printed up and spent in the economy will reduce the value of the dollars already held. Unless you can count on rising interest payments and dividends--i.e., you don't depend on a paycheck--your wages will fall in real terms, of what you can buy even as you have more dollars to spend.

Wage-earners will suffer disproportionally, a fact which most of our ruling class will hardly be concerned with. That's because our government has become one bent around the interests of the investor class and corporations. The drop-off in economic activity will hurt them far less than the millions who will have to suffer without health care, secure employment, or retirement savings. The rich, though their numbers will undoubtedly be reduced, will have their survivors who emerge far better off in relative terms than their fellow Americans. "Oh, Muffy we're going to have to dip into principal this year for our trip to Monaco."

The imbalance in wealth does create a major threat to capitalism. Once enough people realize that the status quo is negative--for them but not the investor class and corporations controlling our government--they could actually rebel. This leads to the Mad Max-type scenarios spelled out in conspiracy sites all over the Web.

For the first time in decades, the US has assigned two combat brigades straight off duty in Baghdad for domestic security. A recent alarming report from the Army War College (link below) suggests the military will be needed in the event of economic collapse.

Militarization of our police forces is in fact well underway, the result of years of unrestrained intrusion into our civil liberties under the guise of the War on Terror and Drugs. Tazers and the so-called "Pain Ray," the Active Denial System (now available, in limited quantities, in rifle form) stand waiting for any unapproved gatherings or rebellious souls.

It's easy to theorize a worst-case scenario, but history indicates that our future will likely not be the worst we can envision. Nor will it be the best we can hope for. Rather the future lies somewhere in between.

We will need to be prepared for the ongoing economic woes that Bush-era policies have aggravated. We need to exercise extreme caution with where we put our money--I suspect that Madoff-style Ponzi pyramid schemes exist not in isolated pockets but rather pervade the largest players in our financial system. The bailout could be a giant scam, a slush fund transfering money from our Treasury, through a private banking cartel called the Fed, to banks which contributed to the crisis. And taxpayers will be paying interest on those loans forever (even as the allocations and terms of the TARP loans remain shrouded in mystery.)

Before our current monetary system fails, you should keep your assets in precious metals or real assets. Don't settle for a fund that claims to owns these types of assets. Until you actually own the property, or can touch your precious metals, you don't actually own anything but an IOU, which is precisely what the dollar is (it says so at the top, "Payable on Demand, Federal Reserve Note.") You won't be able to pay your bills with an IOU, or a promise from a debtor, especially if the debtor 1) owes everyone else, 2) has no assets, 3) feels no responsibility to pay. Don't be owed. Own.

Miss it? From October: "Anti-Democratic Nature of US Capitalism is Being Exposed", by Norm Chomsky, The Irish Times.

"US Army War College issues report", a post on WW4report.com. This blog entry offers links to the report and the only mainstream article covering it at the time, Phoenix Business Journal.


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