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.

///