Economics

I am not going to say that I told you so, but at least 2 years ago ( Link1 ) I was warning people about a severe decline or crash in our economy, as well as, the concept of “Peak Oil” and how gas prices would rise considerably. People who are familiar with my opinion pieces, via forums and blogs, know that I have been trumpeting the alarm for sometime now. However, unfortunately I was usually dismissed as some anti-capitalist, anti-American doomsayers who actually wanted to see the fall of capitalism and America. I was viewed as a socialist/communist and folks retorted with historical examples of the failures of those systems (while ignoring the fallacies of our own) and how our system was so much more superior and impervious to a similar fate. Well, our system is now on the edges of something tragic and could fall over the proverbial cliff from the push of a combination of events.

The truth is that we are already in a recession, but it is simply hidden by how the government calculates the rate of inflation. The nominal growth of the economy needs to be adjusted by the degree or percentage by which prices have risen year over year. If nominal (unadjusted for price changes) growth in the Gross Domestic Product (GDP) was 6% and the Consumer Price Index (CPI) rose 3% over the same period, then REAL economic growth (GDP growth – CPI growth) would be only 3%. However, what if the real rate of inflation was 7%? That would mean that GDP declined by 1%. Well, government official CPI excludes commodities like food and energy, healthcare cost, the rise in the cost of education and a hose of other purchases that Americans make. Official CPI only measures those things that are not rising in price drastically, while excluding those things that most people purchase, that are.

Why? How can this be happening to the superior American people and our superior economic/political system? You will not hear the real reason why in the mainstream print or electronic media. Suffice it to say however, it is not the result of the sub prime crisis, which is simply a symptom of something larger. We have to be honest about how we made it to the top, which was largely from events outside our direct control, namely the Second World War which destroyed all the major economies except our own. This created a global monopoly for America Inc. and our nation and people prospered from it. Peace however, eventually allowed Great Britan, France, Germany, Western Europe and Japan to recover and turn America’s monopoly into an oligopoly with those recovering nations. That recovery led to our going off the Gold Standard, as a result of changing economic realities globally. A new fiat system was created, which kept us out of depression. Now, China, India, Brazil and others are turning the oligopoly into a truly competitive global market, where they have gained the economic comparative advantage in many industries and economic sectors. The fiat system that once saved us is now part of the problem.

Examine this hypothetical. Suppose you work for a store that is the only store left standing in town after a tornado or hurricane smashes through town. The resultant is that your store is going to get all the business and you are going to get a big raise, by demanding it, to get your share of the huge profits your store now enjoys from the ability to charge higher prices due to the lack of competition. This artificial prosperity is the result of others misfortune and will last as long as other remain unfortunate. However, as old stores rebuild and new stores enter the market, with much lower prices, consumers will take their business away from your high priced store that was once the only option. The new stores, with their cheap labor, can offer much lower prices. Thus, in order to be competitive your store will have to lower wages to match their competition so that they can be price competitive….or go out of business. Either way, you as a worker in the store will suffer a loss in the form of no job or a job at much lower wages. America is that store that survived the storm while others were devastated by it. We artificially prospered from it and now reality of a lower standard of living is embarking upon us.

The over optimistic mindset of the consumer, augmented by government and media propaganda, the rampant creation of money (debt/credit via borrowing) is what is keeping the economy out of recession and depression right now. Most Americans still have a fantasy view of the natural superiority of our system to always keep us on top. We are the smartest and hardest working people on the planet and that will keep us on top. Yeah right. That is not reality. Our economy is now dependent upon consumers going into deeper and deeper debt in order to keep the economy buoyant. The reason that so many were willing to go into debt is because of two assets, their home and their investment portfolio (stocks). Working age people over 30 looked at their home and their stocks as their retirement nest egg. There was no need to save when homes were appreciating and stock prices were climbing well above the rate of inflation. Well the bottom has fallen out of the housing market and when it falls out of the stock market, consumers will radically reduce consumption in order to save more for retirement and an uncertain future. When consumers radically cut consumption, production is radically reduced causing a rise in unemployment, poverty and the like and a downward economic cycle of actions and reactions is unleashed.

This psychological threshold will be breached when the DOW falls below the 10,000 mark. There will not be a stock market crash, like during the last depression, however. There have been safe guards built into the system of trading to prevent that. Instead, what will happen is a long term (over a year’s time) cycle of ups and downs with the downs being much stronger than the ups? Overtime this will produce the same loss of wealth as a stock market one week crash. In the mean time, the monetary policy of lowering the cost of money (borrowing) is the strategy to keep consumers spending and providing stimulus for Wall Street. The effect of creating such a large amount of personal debt, however, is that citizens will become indentured servants to their debts. Not only that, such monetary policy will result in the collapsing of our currency and a hyperinflationary period that will send millions into abject poverty, government rationing and a radical change of America as we now know it. A more ominous accelerator of decline is when the FED starts to raise interest rates during the decline, to attempt to choke off the inflation it brought to life by lowering interest rates.

There is nothing that can be done at this point but attempt to control our fall. Standing tall is no longer a viable option. The reason being is that the fiscal and monetary policy used to control the economy will only make matters worse at this point. Normally, cutting taxes and lowering interest rates are the fiscal and monetary policy used to accelerate or decelerate economic activity. The problem now is that we almost have the pedal to the metal, so to speak, in regards to these policies, and the economy is still decelerating. If we press harder on the accelerator the engine might be damaged considerably. Cutting taxes in during war time and record levels of government debt will debase the currency. Lowering interest rates will also debase the currency. The debasing of the currency will lead to rampant inflation that destroys the purchasing power of income that because it does not keep pace with the rise in prices. Millions of people then become the working poor as their income which once afforded middle class comfort can only provide basic substance.

Meanwhile, the basic loss of comparative advantage under globalization and the free market continues to send American jobs and production oversees. The catch-22 for America and Americans is that we want to have our cake and eat it too, which is an impossibility. More precisely, we covet cheap prices. However, cheap prices come by virtue of cheap wages, as a general rule. A nation cannot sustain high wages and low prices as an economic model, due to how heavily wages and benefits are a component of price. That said, a high wage nation in transition to a low wage nation will manifest both high wages and low prices until the transition is complete from a higher wage nation to a lower or median wage nation, depending on the global free market price point of labor will produce. That is what is happening in America today as manufacturing, engineering, software design; call centers and a hose of other employment sectors are being off shored, while we are importing cheap labor from Mexico to drive down wages domestically as well.

If all that is not enough, I have yet to even integrate the effects of peak-oil (declining oil reserves growth/supplies married with increasing demand), the retirement of the baby boomers, war and the like. These things, even during good economic times, would hurt our economy, yet, they are manifesting at the same time as all these other factors. There are things that you can do to prepare yourself; however, very few can or will escape being hurt by this. Traditionally, it is under such times that governments embark upon wars to relive the population of angry males who could or would turn their wrath against the system and its elite. That way the internal threat can be sent off to war and die on the battlefields instead of filling the unemployment lines, jails and becoming radical militants attempting to overthrow the government, like the many anti-government militia groups that exist throughout America. War will help to create patriotism and get disenfranchised people feeling patriotic against an external enemy. It’s not hard to guess what nation that will be, if it happens.

Today, there are a lot more people who will read what I say and find agreement, due to the fact that it has become more obvious that something it terribly wrong. Yet, people still do not get it, even though they may feel the nation is sliding into recession. They likely think "been there done that" and feel that might decline but pick right back up creating record levels of wealth again in a few years. WRONG!! Not this time. Things will NEVER return to their zenith, after we hit bottom. There will not be a stronger bounce back this time around, although the nation will recover, it will never again be what it was economically because the world has changed too much.