Saturday, September 18, 2010

Can we climb out of this hole and grow the economy?

I am not an economist. I am fortunate to never have studied economics in an American University because most of them force young people through incredibly convoluted exercises to try to prove that the patently absurd is true and provable. I admit that perhaps the University of Chicago offers instruction that may apply to the real world, but none of the Ivy League Schools do. At any rate, I have not been indoctrinated in any school of economic theory, but rather have studied on my own. I am not an economist; I am an enthusiast.

So, why do I have the cheek to publicly share my ideas on this arcane subject, otherwise known as the dismal science? I do so because the people that are being listened to, walls plastered with diplomas from Harvard and PhDs from Yale are giving us directions that will lead us directly off of a cliff. These are the same geniuses that did not see the dotcom bubble coming , nor did they see the real-estate bubble coming . They saw no danger in the explosion of derivatives, nor the fact that the Primary Dealer banks practice accounting fraud on a massive scale and are protected from scrutiny by the Secretary of the Treasury.

. They assured us that by hiring nuclear physicists to write complex logarithms that subprime mortgages could be bundled together into AAA rated bonds that would be rock-solid. One of these eminences, in fact, was still assuring people in 2008 that the original culprits, Fanny Mae and Freddy Mac, were still rock solid. Well, maybe not. In fact it now looks like they pose a 5.6 Trillion dollar liability to the American taxpayer.

So, as far as I am concerned the call for enthusuiasts to step back and let the “professionals” work things out sounds pretty stupid. Paul Krugman, Ben Bernake and Alan Greenspan can explain in complicated jargon a lot of gobbledygook but they don’t see the sun in the sky.

With no economics training I was able to predict both the dotcom bubble and the real-estate bubble. I was also able to predict that bailing out the Primary Dealers, and “stimulating” the economy with five or six major regurgitations of printed money would do nothing to get us out of recession and put the economy back on track. The economy is dead and is not going to recover by dumping money out of helicopters. In fact, I will now predict that if we continue along with the plan put forth by Ben Bernanke at the economics summit in Wyoming in August, that the USA will suffer an economic collapse triggered by an attack on Treasury bonds. The effect of forcing an endless river of cheap money into the market will be to erase international confidence in the dollar as a reliable store of wealth. As I write this, the majority of US bonds at auction are being bought directly by the Fed. Japan and China are both looking for a way out of the dollar and Obama and his 535 thieves keep spending money like they had some, but they don’t. It may take a year, maybe two or three, but if we don’t change course our bond market will be attacked and there will be a stampede out of the dollar. John Williams from thinks that it will happen in as little as six months . The prescription from both the Democrats in charge and the Republican leadership that is coming in, is to treat the crisis caused by excessive money creation, spending and debt with more money creation, spending and debt. So I’m pretty sure that a collapse is inevitable, but it wouldn’t have to be.

First, before giving my prescription for how to save the economy, let me digress one more time and explain something that confused me for a long time and that is the flations. You’ve got INflation, DEflation and HYPER-INflation. Most economists feel that the end game, if it were to occur would be a hyper-inflationary collapse of the dollar. But the geniuses mentioned above scoff at the idea of hyper-inflation at this point. After all we are in the middle of deflation. Asset values are collapsing, trillions have disappeared, inflation isn't anywhere to be seen. In fact the Fed is doing everything it can to get a little inflation started, so anybody who’s predicting hyperinflation now is just some crazy conspiracy theorist, right? Maybe not.

It seems logical to think that hyper-inflation is just accelerated inflation, you have to ascend through “normal” inflation to get into the destructive feedback loop of hyper-inflation. But lets think about what inflation is: it is when a growing money supply is chasing a stagnant or slower growing supply of goods and services. Things get more expensive as more units of money chase a steady amount of goods and service. (This gets more complicated when you add credit into the mix, so I won’t; this example works well enough). But hyper-inflation does not occur because the money supply is increased. It happens when the supply of goods and services is rapidly and sharply reduced. In these cases (Argentina, Zimbabwe, Weimar Republic), the reason behind the disappearance of goods and services is always the same: a loss of faith in money. When the store owner feels that the money is going to become worthless, he doesn’t want to sell his stock, and if he does he’s going to charge a LOT more than he did yesterday so that he can quickly buy something and not hold onto money.

It is entirely possible to go from deflation directly into hyper-inflation, if something spooks the herd and gets them all going in the same direction, you can have a catastrophe. The Fed and the government have created the conditions for the catastrophe and they are continuing to do the wrong things at higher velocity.

So what can we do to avoid disaster? We can voluntarily accept significant pain RIGHT NOW and reform our government completely in order to create a foundation upon which we can return to strong growth and full employment. There will be pain; that much is guaranteed. If we decide to take it now, we can be prepared and hopefully show solidarity to those who need help to keep themselves fed and warm. After taking the pain required to force all the toxic crap and unpayable debt out of the economy, then we need to recreate the Federal government into a sustainable servant of the People. It can be done and these ideas would work. An analogy to the choice between my program and what is probably going to be done, are the Depressions of 1920-1921 and 1929-1945. What happened in 1920?

“The economic situation in 1920 was grim. By that year unemployment had jumped from 4 percent to nearly 12 percent, and GNP declined 17 percent. No wonder, then, that Secretary of Commerce Herbert Hoover — falsely characterized as a supporter of laissez-faire economics — urged President Harding to consider an array of interventions to turn the economy around. Hoover was ignored.
Instead of "fiscal stimulus," Harding cut the government's budget nearly in half between 1920 and 1922. The rest of Harding's approach was equally laissez-faire. Tax rates were slashed for all income groups. The national debt was reduced by one-third.” The Depression lasted less than a year and a half. From this article by Tom Woods.

The Great Depression was a very different story because of the way it was handled. Like today, the government frantically tried to stimulate spending and to control prices and to put people to work in pointless projects. The situation got progressively worse and scapegoats were produced. The most important of which being gold money. Roosevelt stole the peoples gold money and started an inflation guaranteed to further impoverish the poor. The Great Depression lasted ten times longer than the Depression of 1920 and it caused immeasurably more suffering. So I suggest that we follow the example of President Harding, rather than the statist demagogues, Roosevelt and Hoover. Let’s cut taxes and spending, force the bad debt out into the open and then rebuild.

So here are the steps:

1.- Cut Federal spending by 40%. This will require: Laying off Federal employees by the busload. Closing the Depts. of Agriculture, Education, Interior, Energy and Labor. Cutting the Defense budget by 50%. In the rest of discretionary spending, each Department must cut costs by 40%. Entitlement Programs will have to: Cut Medicare payments to only include lifesaving care for two years. After that time the program needs to be redesigned. Cut social security payments by 15% and raise the retirement age to 67. The Entitlements have grown way beyond what people paid into the system. They need to be cut to sustainable levels. This is the shock to end the deficit and rebuild international faith in our bonds. This will protect us from an attack on the bond market, as long as it is coordinated with #2.

2.- Force the Fed to raise the Federal Funds rate to 4%. No more Quantitative easing. No more money printing. No more purchases of US Bonds at auction (unless there is no other possibility) With rising interest rates the 40% cut in Federal spending will only be worth 35% as interest payments rise, but our bonds will quickly become more attractive. The Fed will have no need to buy our paper. People will start to save again and capital will begin to be accumulated.

3.- Hire Bill Black and 1000 forensic accountants to investigate the banks and close any that aren’t solvent. As interest rates rise, banks that are fraudulently holding a negative balance sheet will be forced out in the open. They need to be dismantled and their assets sold at auction. If accounting fraud is detected, the administrators need to be prosecuted and sent to prison.

4.- Make it easier for citizens to default on debt. This should be a window of a year or two to let people walk away from their homes, their student loan debt and other debt that keeps the economy from working.

5.- Unilaterally withdraw from all international trade organizations. This is one time when having the world’s largest military will be handy. Other countries may howl, but that’s all they can do.

6.- Erase all existing tariffs, import quotas, restrictions and duties, then impose an across-the-board 12% tariff on all imported goods and services with no exceptions. Remove the possibility that politicians will use trade policy to the advantage of campaign donors.

7.- Throw out the entire, complex US income tax code. Taxes will be paid on all income at the rate of 15%. Every adult will have a $10,000 deductible; every dependent child will have a $5,000 deductible. There will be no other deductions. There will be no capital gains tax. There will be no estate tax.

8.- Rescind the Legal Tender laws to keep the government honest. Allow alternative currencies to compete with the dollar freely. This makes the Fed unnecessary and that leads to the last step.

9.- Close the Federal Reserve System. Without the legal tender laws there is no reason for the Fed to exist.

If we had the courage and vision to follow this plan, in 24 months this country would be working again and our economy would have rebounded. We would once again have the most dynamic economy in the world. That would mean that no one would retaliate against our tariff by anything more than an equal tariff because our market would be too important.
We would end all the pointless wars, close all of our overseas bases and cut the military back to only what is needed to protect America and our territories.

We would end Federal financing of student loans, agribusiness, drug and food regulations and we would work at ending the idea of a government-controlled economy.

The government could not spend money that it didn’t have because of the repeal of the legal tender laws. If they print money, people will simply refuse to accept the government money. A balanced budget amendment can be by-passed, but without a monopoly on money creation, the government cannot spend what it doesn’t have.

This list will not be implemented, not even one part of this will happen. It is too radical, too shocking, but something IS going to happen even more shocking than this list: the collapse of the dollar. So this list may serve for the reconstruction of the country after our collapse.


Anonymous said...

This is an interesting old comic strip.

It is all about the dangers of deficit spending and inflation and is a message to today from years ago.

Chris Ferrell said...

That's quite a find.

We have done just what the comic suggested, we have destroyed ourselves. The currency and the economy are going to collapse unless we apply at least some of the bitter medicine above. But we won't apply any of the bitter medicine. The Federal government is insane. It cannot make rational decisions any longer.

The cartoon also reminds me of the strategy of Osama bin Laden. He said that an attack on the USA would cause us to destroy ourselves as we spend ourselves into penury flailing around in the Mid East. We have followed his script perfectly. We have been played like a fiddle