Our Alcoholic Economy

I am not an alcoholic, nor have I ever been addicted to anything more damaging than Massive Multiplayer Online Games, so take everything that follows with a salt shaker or two.  However, I have known a number of alcoholics in various stages of the spectrum, from denial to recovery.  Those that were actively working on their recovery had a common theme when asked when they decided to stop drinking:  they all hit bottom.  Not the “If I take another drink I am going to puke my guts out” bottom.  Most of these people did that nightly, spending many hours praying at the “porcelain altar.”  I am talking about really hitting bottom…the kind of place where you realize you have destroyed everything and everyone you held dear to you and there is no point in living another hour.  What does this have to do with the economy you ask?

Our economy is addicted to debt.  Ever since we went off the gold standard in 1933, our economy has been entirely based on debt.  Don’t believe me?  Think I am exaggerating?  Pull out a dollar and look at the inscription on the front: “This note is legal tender for all debts, public and private.”  Sounds innocent enough.  However, prior to 1933, it would have read: “Redeemable in gold on demand at the United States Treasury, or in gold or lawful money at any Federal Reserve Bank.”  Notice the difference?  What are our current dollars redeemable for?  Nada…zilch…nothing!  It used to be that if someone owed you money for a debt, you could actually require them to pay you in gold or silver instead of paper money.  However, that “legal tender” statement on the front of our current money means that you no longer even have that option.  Our money is not backed by anything.  Why does this matter?  And how does this relate to alcoholics?

Let me take one more detour before I finally tie all these things together.  What causes inflation?  The Federal Reserve is tasked with keeping inflation in check, and I know we have all heard that they do this by adjusting interest rates up or down, but how does that really affect inflation?  In a fiat currency system (one where currency is not backed by anything of intrinsic worth), inflation is the result of too much cash being in circulation.  When this happens, the value of one unit of currency (henceforth, I will just say dollar, but understand it works the same way in other currencies as well) declines.  When the supply of money flowing into a community or country outstrips the supply of goods, merchants will have more people than ever before looking to buy their goods.  However, they do not have the supplies to meet the demand, so prices will inevitably go up.  When the Fed sees signs that this is happening, they know there is too much money in the system.  Therefore, they raise interest rates, which in turn makes it more expensive to borrow money, and thus there will be less money pouring into the system.  They can also buy or sell Treasury bills on the open market, thus increasing or decreasing the amount of money in circulation directly.  There were four measures that the Federal Reserve would publish to let people know how much money was in circulation.  The M0 rating was just the number of dollars the Federal Reserve had directly printed and were in circulation.  The M1 measure was M0 plus checking account deposits, the M2 measure was M1 plus savings accounts and money market funds held by personal investors (things which could readily be converted to cash).  In 2005, the Fed decided to stop tracking the M3 measure, claiming no one used it anyway.  However, Congressman Ron Paul claimed that “M3 is the best description of how quickly the Fed is creating new money and credit. Common sense tells us that a government central bank creating new money out of thin air depreciates the value of each dollar in circulation.”  What did M3 track, you ask?  Among other things, the loans made to large corporations, like the ones receiving bail-out money.  I believe the Fed stopped reporting the M3 statistic because it knew what was coming…not in a conspiratorial sense, but rather in a “we have our fingers on the pulse of the economy” kind of way.

Will you get to the point about the alcoholics already?!?

OK, not-so-patient reader, you have endured enough of my A.D.D. moments, I will finally get to the point.  I believe that our economy, just like an alcoholic, must hit bottom before the federal government will be forced to make the painful changes.    I believe a lot of companies are going to fail and a lot of people are going to be out of work.  While I will point a lot of the blame in the direction of George W. Bush, this problem started much earlier.  In my opinion, it traces its roots back to the Great Depression.  What were some of the milestones along the way that should have sent up warning flags?

  1. Going off the gold, and later the silver, standard.
  2. The founding of an unconstitutional national bank, the Federal Reserve.
  3. The rampant, uncontrolled government spending placing us further and further in debt.
  4. The growing power of labor unions driving U.S. companies to become less competitive on the world market.
  5. The shift from America as a land of production and innovation to a land of consumerism.

The governments (both the Bush administration and the incoming Obama administration) are trying to soften the blow.  They are trying to give us just enough of the picture to get us to take the next step without realizing the full extent of the danger we are in.  They don’t want us to actually hit bottom.  Instead the government is hoping that we can cushion our landing.  What’s wrong with that, you ask?  Everything!  Without hitting the bottom, the problem just gets worse.  All of the well-meaning friends of the alcoholic who try to convince him that he doesn’t have to quit drinking just cut back, that try to find him a new job, or introduce him to a girl they know, are not letting him hit bottom; they aren’t letting the drunk see that the only way for things to get better is to CHANGE!!!

The government doesn’t want to have to change.  They started off with the bail-out of AIG and news that they would offer funds and loan guarantees to help with the buy-out of Bear-Stearns.  Then came the mind-blowingly large $700 billion bail-out bill in Congress.  But, as some of us warned, that was just the tip of the iceberg.  How much are we really on the line for?  Please sit down before reading this link (and for those that skipped it, please go back and read it…it will likely make you feel sick, but again, it is part of hitting bottom).  That’s right folks, $7,700,000,000,000.00 ($7.7 trillion)!!!!!!!!!  And the truly frightening part is, we aren’t done yet.  Today, they announced that Citibank was receiving bail-out money.  Why is that significant?  Because Citibank was considered one of the most solvent banks (one least likely to need a bail-out).  If they need cash, the rest of the banks are only a question of when, not if.

And what about the rest of the economy?  What about the automakers?  Should the government throw cash down that rabbit hole?  In my not-so-humble opinion…NO!  Did you know that the average assembly-line worker at G.M. makes over $70 per hour?  Did you know that the person doing the same job at the American Toyota plant makes less than $45 per hour?  Is it any wonder that G.M.s cost more than Toyotas?  Also, G.M.’s pension liability for 2004 was $89 billion.  Again, I consider this a major problem with labor unions, especially in the auto industry.  If G.M. could file for bankruptcy, no matter how painful that might be, it could give them a way to renegotiate some of these burdens.  However, I don’t expect that the government will let that happen.  Instead, I predict that Obama will bail them out (if Bush doesn’t beat him to it).

How much longer do you think this downward spiral of endless government spending can continue?  How much longer will it be before China and the rest of the world refuse to buy any more Treasury bills that are only backed by “the full faith and credit of the U.S. government”?  How long before the credit rating companies downgrade our government’s credit rating, making it vastly more expensive to borrow money?  Guys, I hate to be the one to break it to you, but the plane is losing altitude and there is a mountain range looming ahead of us.  All of the government tricks are only postponing the inevitable.  The plane is going to crash, the only questions are when and how hard.

Published in: on November 25, 2008 at 1:15 am  Comments (5)  
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5 CommentsLeave a comment

  1. Great post! As far as all these bail outs go, I have been screaming till I am hoarse, and then screaming some more over these atrocities. How McCain and Paulson and other supposed conservatiesgot behind them is beyond me. There needs to be a bottoming out but as you noted, they(the congress, and soon Obama) will not let it happen.

    And then soon this country will be the alcoholic who has not just lost his job, but his house his family, his everything. It is scary just how much closer we are getting to a completely socialistic society. The more people they entice with their “free” money the more who will continue to vote to keep these people in power and the farther down we fall.

    Blogs like these will hopefully start educating people on the folly of ‘big govt’

    Blog on!

  2. I don’t think the plane is going to crash because myself and all my competitors charted private jets to fly to Washington and begged them to bail out our failing companies.

    For once I wish all these “wealthy” CEOs would have to fly coach like I have to for my job. Make them earn their medallion status before they can fly first class just like I had to.

  3. I know I am probably all alone on this one, but when the big three automakers’ CEOs flew to Washington in corporate jets to ask for a bailout, the jets didn’t bother me. I guess I just figured they were purchased when times were good for the automakers and have long since been paid for. What bothered me about the idea of bailing out the Big Three was that the plan wouldn’t get them out from under the enormous bill each year for pensions for people who no longer work there, nor would it address the fact that union workers on their assembly lines make nearly three times the average hourly wage in this country (compared to double the average wage at their Japanese competitors). Nor did it address the unreasonable and illogical requirement the government imposed upon them to increase fuel efficiency standards and switch over to using more ethanol. It seemed like they were saying, “We are bleeding here, so we want a blood transfusion. No, no, don’t bother trying to stop the bleeding, we just need more blood so we can keep going.”

  4. http://www.freep.com/article/20081122/BUSINESS06/811220370/1019/Business06

    Looks like Ford owns theirs, so okay. But the other two lease theirs.

    But you do make valid points.

  5. Great way to put it with the blood transfusion scenario. That’s EXACTLY what they’re doing!


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