Economic and political analysis-Window on culture-Media criticism

Thursday, July 01, 2010

A new struggle for Independence begins

I'm afraid America's fallen off track, perhaps irrevocably so. Humpty Dumpty fell off the wall kind of stuff. We're getting beat by the Chinese, who are working for less. Our leaders have abandoned domestic employment for offshoring and outsourcing. Worst of all, there appears to be no end in sight to the draining of the American economy.

Now for quite some time wages have been falling in real terms. "Real" is defined in economic terms as the true purchasing power of the dollars that we earn. If prices go up, and our wages go up a corresponding amount, then income gains are cancelled out.

Most Americans are woefully ignorant about the present value of money--the concept that our money loses value over time. Instead, prices are said to be going up while in fact it's the dollar that's going down. Nowhere has this been clearer than with the price of gold. Speculation drives prices up, yes, but it's ultimately the weakening purchasing power of the dollar that makes commodity prices rise.

If Americans really knew how the current banking system was set up to devalue their currency, they'd grab their pitchforks and storm the castle. Ignorance therefore plays a vital role in perpetuating the myth that the dollar is a store of value when it's really designed to lose value, 96% of it as a matter of fact since the inception of the Federal Reserve.

So if you had bought dollars in 1913, put them in your mattress and pulled them out, they'd be worth four cents in today's money (excepting of course the value of the physical currency to collectors.) Perhaps a better example would be the penny. So devalued has the penny become that Congress actually had to pass a law to prevent pennies from being melted down for scrap--the copper in them is worth more than one cent. Eventually our currency will be so devalued that a penny might only be worth a quarter of a cent, an eighth, and so on until its copper value becomes too expensive to justify its use in the coin. Perhaps you've seen the cheap foreign currencies made from aluminum.

So the penny is a proxy for our weakening currency. Yet most Americans ignore the constant devaluation of their currency. I say "their" because it is the people's money. Their representatives in Congress--at least they should be "theirs" according to the Constitution--have the exclusive right to control the issuance of money. Every year, Congress grants the Federal Reserve the right to distribute money. Not surprisingly, every year the Federal Reserve brings into existence more money, meaning the money out there is worth less.

Say the Federal Reserve expands the money supply by 100%. Instead of, let's say, $5 trillion in circulation, there's $10 trillion. Imagine if a corporation did that with their stock, doubling the amount issued every year. What would happen to the poor saps who bought last year's stock? Where would the price go? Well unless the company had a banner year, the stock price would likely fall, perhaps by half. Why? The ownership shares which the company issues in the form of its stock get diluted. More shares: existing shares worth less.

Now the same is true with your money. The government upon which people depend to preserve the value of their savings is actually working against them. It's diluting the value of existing dollars by printing or distributing more of them.

Now of course the Treasury and the banks that constitute the Federal Reserve have their little tricks...well, ok, maybe not so little...to conceal the massive increases in money supply. First, they abandoned tracking the amount of money in circulation a few years back. A valuable statistic called M3 was no longer made public. As a result of the change, following the real quantity of dollars out there became more challenging, subject to more subjective analysis, and therefore harder to pinpoint.

Why did the government abandon tracking? Well, you could say they have something to hide. Something called shadow banking. Shadow banking is a system of loans and securitization of debts that allows banks to create money in the present from debts payable in the future. By lending amongst themselves, banks can convert a stream of future payments--a mortgage payout, let's say--into what's called a "present value". The present value is of course dependent on how certain the debt is to be repaid. As we saw in the mortgage crisis, the level of debt repayment uncertainty rises, so too does the risk premium, or amount that lenders charge borrowers, goes up. Perhaps way up, to the point the funds from investors simply aren't available, except at usurious rates.

Now the problem with securitization of all those mortgages--securitization means the process of converting future payments into a present day value--is that assumptions have been built into the value of the debt, assumptions that may not be true, or subject to changing conditions.

As the uncertainty of mortgage borrowers ability to repay climbs, the appetite for risk among the banks declines. You end up with a situation a lot like you see today, where lenders are hesitant to lend, or at least stop lending cheaply.

Now the purpose of my explanation here is not to review the reasons for the mortgage crisis. Instead, I wanted to offer as full an explanation of why the US economy is about to experience a second meltdown.

History often repeats itself. If the causes for the meltdown in 2008 (and the decline in stocks through 2009) still exist today, then the probability of a reoccurrence remains. And the magnitude of the correction could be even larger if the causes of the past meltdown haven't been reduced or eliminated.

I could go over the conduct of companies which had a key role in the mortgage meltdown--either profiting from it, or exploiting it and/or the subsequent bailout, but that's not relevant really for a couple of reasons. All that really matters is the system that allowed the mortgage crisis to occur still remains.

If you've read anything that I've been saying over the past four years, you'll surely know that I'm predicting a major crisis at this point. And it won't be an economic cause. Whatever our nations struggle with international competition, the reality is that our financial system is completely demolished. The regulatory bodies failed the American people in 2008 haven't been repaired. The so-called financial reform, as far as I can tell, doesn't go far enough in preventing the kind of abuses that made the 2008 crisis possible.

Former bank regulator Bill Black has blamed the collapse on mortgage fraud. Fraud is an important word. It essentially means to employ deceit or trickery. The truth represents a threat to the fraudsters; they operate using a opaque screen to cover their misdeeds. And our government, which should be regulating the financial entities, has been compromised utterly by their political influence.

We've reached a point of no going back. The relationship between cronies within/into/out of government, and corporation and government have become too strong. The democratic will of people--as established in the vital preamble to the Constitution--has been violated. As a result, I can go on no longer in placing my faith in the operation of government, or its role in regulating the currency.

In my opinion, the lack of regulatory enforcement is a window into the murky cross-relationship between those with money and those in power. The only way to end such a relationship is to let the economy go where it must--where the pain of going as as we do exceeds the pain of change.

Of course the ramifications of no change will continue to grow, and manifest themselves in the state of our economy, and in other troubling ways. Catherine Austin Fitts has labelled the system built around making profit from misery a tapeworm economy. The Military Industrial Complex and the Banking Establishment have grown so powerful that they now control our nation's policies at the highest level, no matter their popularity or acceptance. And the two-party system avoids accountability, by exchanging twiddleedee with twiddleedum every so often, in periods long enough to capitalize on the American public seeming mystifying inability to remember.

Why do I write this? Not to depress you, the reader, but rather to warn you of the need to take action. Protect yourself from the constant devaluation of the currency. And unfortunately I must recommend you divest yourself of the American stock market until such time as the Republic--and its controls over the corporate sphere--have been reestablished.

I'm not expecting miracles overnight. It will take a great deal of courage and strength to contest the status quo. Absent resistance to the order, it's likely the economy will slide into ever worsening stagnancy, with constant devaluation of our savings and lethargy in the stock market or worse. The need for real lasting political change overshadows now whatever confidence remains in the system, a system so corrupt and rotten it can only be removed in entirety. Pull the root, and don't hack at its branches.

Labels: , , , , ,


  • At 11:56 PM, Blogger jbpeebles said…

    Posted the comment below from mybudget360.com

    That site tries to build up a working body of skills and techniques to manage debt, among them the idea of a ladder of financial needs. The bottom rung is a small emergency fund. This is done to keep potential investors from tapping their investments early. Then insurance needs must be dealt with. Then reduce debt outlays and fully fund the emergency fund. The next rung--which is often positioned as the first by salespeople--is to invest.

    I know this isn't tied too much to the original post, but I did want to provide a measure of hope, as well as a vital element of assuming more responsibility over one's life, rather than becoming a debt slave.

    I had a similar theme when I posted a comment on a good article on college/education by Carolyn Baker at OpEdNews.com (see the link on the right of my blogpage for my comments.)

    /Start comment at mybudget360.com:

    Excellent post. I'd seen some of these facts before but the charts assembled here characterize the problems the middle class are facing.

    It's impossible not to imagine a political agenda here. Historically, revolutions have been started by the middle class as the peasants and lower classes are simply struggling to survive.

    With fewer resources, more debt, and unreliable income, the middle class is being subjected to what I call povertization. It's hopeful to think Americans can build an emergency fund to avoid the certain cash shortages that await. Once that's in place, it's possible to participate in the stock markets as an investor. (Contrary to the author, I consider some kinds of insurance and mutual fund sales direct to the public as hard work, even if the "idle" Wall Street people are part of Fitts' "Tapeworm Economy.")

    Get the public investing again like the 90's and the middle class can do better. Yet to get to the point more people can invest, they need to reduce consumption, which of course hurts the economy. And they need jobs, which requires protection from unfair competition and lax enforcement of regulatory standards abroad.

    A measured increase in spending, within one's means, can boost the economy. Investing domestically (or even better, locally) can have a good impact. Meanwhile one has to protect one's investments with precious metals, although investing in them puts few fellow Americans to work compared to buying shares. Your money needs to stay local to work effectively, so avoid chain restaurants, Fast Food, and Big Box retailers when you can. The reduction in consumption of bad and unnecessary things can be a good thing...as a matter of fact, lowering consumption will be the chief benefit of hard times being forced upon us.

    See also a Richard Wolff video here (courtesy whaytreallyhappened.com):

    /end comment


Post a Comment

<< Home