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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Obama to Abandon a Sound Idea

On page 42 of President-elect Obama’s Plan for Change, I found a piece that I actually agreed with.  This is his support for a PAYGO system (i.e., pay as you go).  The idea is that if Congress or the President wants to raise spending, say on Medicare for example, they must pay for that increase by either raising taxes sufficient to cover the cost or by cutting another program or agency, such as the Department of Education.  This way, the budget is supposed to be balanced.  I am all in favor of that, and would love to see it implemented.  After all, as Obama has pointed out, under President George W. Bush, the national debt has gone from $5,700,000,000,000 ($5.7 trillion) to $8,800,000,000,000 ($8.8 trillion).  And of course, that doesn’t even factor in the debt that isn’t listed in that particular set of government books nor does it include the $700 billion from the bail-out bill.  I know, everyone pick your jaws up off the floor; I actually agreed with Obama on something.  Before you sink too deeply into shock, don’t worry – he found a way to get around this particular plank in his plan.

Imagine my “surprise” when I saw the following Reuters headline: “Obama says aiding economy trumps budget deficit.”  Some quotes from the article from Obama:

The consensus is this, that we have to do whatever it takes to get this economy moving again, that we have to — we’re going to have to spend money now to stimulate the economy.

And (consensus is) that we shouldn’t worry about the deficit next year or even the year after; that short term, the most important thing is that we avoid a deepening recession.

I wonder if when he says “…do whatever it takes to get this economy moving again…”, he considers the possibility that what it might take is to get Washington politicians out of the way ?!?  Of course not.  To paraphrase the Bible, “The government giveth, and the government taketh away; blessed be the name of the government.”  And also, always be very afraid when politicians speak of “consensus.”  There is no such thing in most fields!  There isn’t consensus on whether humans cause global warming, there isn’t consensus on whether the federal government can do anything positive for the economy by throwing money at it, heck, there isn’t even consensus over whether Pluto should be classified as a planet!

Am I the only one that remembers the bail-out bill?  Treasury Secretary Paulson went before Congress and in essence told them he was out of tools to stabilize the housing crisis.  He begged, pleaded, and cajoled to get them to pass the bail-out bill without the normal debate.  Paulson’s original plan was only three pages long.  However, it was defeated in the House.  When the Senate ramrodded through a version of the proposal, it had swelled to over 450 pages in just three short days.  Paulson’s plan had been to buy distressed mortgages from banks.  The theory was that if the government bought them, they could do so at a discount, hold them to maturity, and then “turn a profit” when the loan was refinanced or paid off.  This would restore “liquidity” to the credit markets.

Does it surprise anyone that Secretary Paulson has not used one dime of the bailout maoney to purchase a single bad mortgage?  Instead, he decided, without any oversight (since Congress and the President have not moved to fill those roles), that he would buy shares in banks, thereby beginning the process of nationalizing our financial institutions.  Now there is talk of bailing out the “Big Three” automakers.

I had really hoped that the Obama administration was going to at least make an effort, however half-hearted, to balance the budget and end these government give-aways.  No such luck!  The PAYGO system is dead in the water for at least two years.  And with the way this presidential campaign played out, that will be just in time for Obama to trot it out again for the next campaign!

A friend sent me the following.  While fictional, it still has the ring of truth to it.

How a bailout plan works

Young Chuck, moved to Texas and bought a Donkey from a farmer for $100.00.
The farmer agreed to deliver the Donkey the next day. The next day he drove
up and said, ‘Sorry son, but I have some bad news, the donkey died.
Chuck replied, ‘Well, then just give me my money back.
The farmer said, ‘Can’t do that. I went and spent it already.
Chuck said, ‘Ok, then, just bring me the dead donkey.
The farmer asked, ‘What ya gonna do with him?
Chuck said, ‘I’m going to raffle him off.
The farmer said, You can’t raffle off a dead donkey!
Chuck said, ‘Sure I can, Watch me.. I just won’t tell anybody he’s dead.
A month later, the farmer met up with Chuck and asked, ‘What happened with that dead donkey?
Chuck said, ‘I raffled him off. I sold 500 tickets at two dollars a piece and made a profit of $898.00.
The farmer said, ‘Didn’t anyone complain?
Chuck said, ‘Just the guy who won. So I gave him his two dollars back.
Chuck now works for the government as a top advisor on the bailout Plan!

Published in: on November 18, 2008 at 10:39 pm  Comments (5)  
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