Escape & fantasy

[Boom_cha]

Escape and Fantasy
by: Richard Russell

http://www.safehaven.com/Editorials/russell/072903.htm

snip

Right now we're seeing just the tip of the mess. Our federal budget deficit is now half a trillion dollars, and our current account deficit is another half trillion. This is bad enough, but it's financial peanuts compared with what lies ahead.

And the irony is this -- here's the US, the world's biggest debtor nation, playing policeman to the world, running up bills of $3.9 billion a month in Iraq alone and placing our military all over the world. It's obvious that our government leaders are totally refusing to face the situation, and in fact, they're rapidly making it worse.

So changes will have to happen. One change is that free spending by Americans will have to stop -- and the new trend, forced upon Americans, will be savings.

A second change will be parsimony -- American consumers will have to scrimp, to cut back, to economize in order to pay their bills.

A third change will be employment. Jobs will be increasingly difficult to find. Unemployment will remain high as America's manufacturing and service bases are exported to low-wage nations overseas.

A fourth change will be recognition. Slowly but surely Americans will be forced to face the truth -- this nation is spent-up, it's over-spent -- we've spent our future and more.

A fifth change will be the recognition that the US can no longer be the undisputed world's hyper-power. Sure we'll have the world's biggest and baddest military, but that's actually going to be a problem. The problem is expenses. It's just too darn expensive to be military master of the world. It will be too expensive when you're building debts of a trillion dollars a year.

A lot of our success is due to one extraordinary phenomenon. That phenomenon is the acceptance of the dollar as the world's reserve currency. Up to now we've been able to print our debts away. Up to now the world has been willing to accept dollars for their goods and merchandise. But as the mountain of dollars builds up, the world will begin to choke on dollars. The world may even begin to question whether the dollars are a valid holding. When that happens, everything changes. And I mean everything.

[Resistance Is Futile]

1. In summary

All of the above can be summed up in one word: depression II.

In a normal economic downturn, consumers cut back on consumption and production falls. Declines in production cause job loss, which cause further cuts in consumption. Repeat until the government intervenes with expansionary policies. Within the next few decades, however, the American government will be too spent out to intervene on the scale necessary to lift the economy.

To put this in context, the last time government did not try to immediately kick the economy out of a downward recessionary spiral was in the 1930s. The result was the great depression.


There are very few credible economists (right-wing hacks and Enronics scam artists don't count) who aren't deeply worried about what's going to happen to the American economy in the intermediate term. Krugman, for one, expects the big collapse to hit sometime around 2010.

My advice? Move the hell off the continent within the next ten years. Learning Mandarin or Cantonese (these are the main Chinese languages) might not be such a bad bet either.

[nolat]

2. One solution

would be to eliminate income tax. I don't think I need to explain it...at least I hope I don't.

[Resistance Is Futile]

3. Not a solution

Come crunch time, the government won't be able to elimate income tax without defaulting on the debt. Default on the debt and most federal services cease on account of the fact that investors will not lend the federal government any more cash. At this point the government cannot engage in deficit spending to break the downward spiral because no one will lend them the money necessary to run a deficit.


Wait long enough and what's left of the IMF (minus US contributions) will wake up enough to offer some assistance, but not before the US goes through an economic meltdown.

[Boom_cha]

4. Actually

To put this in context, the last time government did not try to immediately kick the economy out of a downward recessionary spiral was in the 1930s.

That's incorrect. In fact, it's completely backwards. The downturn of '29 was the first time in history that the US government tried to actively intervene to counter the business cycle. Previously, the official policy was laissez faire. Unfortunately, the measures that were implemented by Hoover (e.g., raising tarriffs, artificially propping up wages and farm commodity prices) turned a recession into the Great Depression. For a more detailed explanation, I suggest you read America's Great Depression by Murray Rothbard (which, btw, is available for free on line at http://www.mises.org/rothbard/agd.pdf).

[rapier]

6. more notes

Since the 87 market crash the government, thru the Federal Reserve has stepped in boldly to avoid crisis after crisis. The Mexican trouble in 94, the Russian/Asian flu of 97, the LTCM debacle. In all cases the answer has been to flood the system with money to avoid the deflation of financial assets.

In every case more fuel is needed to keep things afloat. As I say, depression is a monetary phenomen firstly. THe question is if profligate monetary policies and the encouragement of easy credit fix the real problems or just forestall an inevitable crash. I say the former.

We will see.

[Boom_cha]

7. I agree with you

Note that I didn't say that Hoover caused the depression, just that he exacerbated it. I agree that Greenspan's grand experiment will end in a deep protracted recession if not a calamitous depression. Btw, I assume you meant, "I say the latter," not the former.

[Centre_Left]

8. What are you doing?

You raise some excellent points, but I have to ask: Are you a libertarian trying to infiltrate this board? If not, how do you reconcile your presumably liberal views with the Austrian viewpoint? Why are you pointing liberals to decidely un-liberal resources from the Austrian economic school?

[Boom_cha]

9. No, I'm no libertarian

but I happen to believe that there is a lot of validity to Austrian economic theory. For me, the key issue with respect to an economic theory is whether it holds true in the real world, not whether it accords with my political views.

[rapier]

5. notes

RE:To put this in context, the last time government did not try to immediately kick the economy out of a downward recessionary spiral was in the 1930s. The result was the great depression.

The "cause" of the depression or any depression cannot be attributed to an improper cure. The great depression was at root a monetary phenomenon and it was the result of speculative excesses, particlulary in the credit markets thruout the 20's. Or so say I. Argue if you will the the treatment of the disease was improper or late but don't say that was the cause.

Now I will veer off onto my typical screed.

Milt Freidman is the primary author of the 'inadequate response was the cause of the depression' school. He focused upon monetary policy which he says was too tight in the face of the deflation and he points to the Fed as the culpret. He too ignores what came before, which was a credit system which ran out of control.

Al Greenspan is a great student of this idea and we are living his dream. He stated years ago he wished he had been Fed Chairman in 29, believeing he could have prevented the depression. Well for years, especially since his first rate cut in Jan 01 he has been delivering the cure. It isn't working.

He is a fool and so is Freidman. I'm not saying we will have a depression but all the conditions are in place for one. The out of control increase of debt in all sectors, government, private and bussiness cannot increase forever. Debt has been growing 3 times or more faster than the economy for several years. One does not need to be a Phd to understand this can't last forever. Much of this debt is backed by nothing, meaning nothing that is profit or income generating in order to pay it off. Thus most new debt is being used to pay off old debt now. ie. home refinaceing. (Which is now dead since long term interst rates are spiking) The day credit growth stops we are likely to see defaults start on a scale few can envison.

There was no easy cure for the problems in American finance and our culture of consumption by the end of the 80's. Certainly no cure palatable to any politician of any stripe. SO they, the politicians and the lord of finance and Easy Al decided that more of the same was better, particularly more debt. It has been a grand experiment.

[jafap]

10. how depressing

I think Milt's point is generally accepted - that tight money during the depression made things worse. The FED acted like a bank instead of like a central bank. Trouble is, that even with the FED lowering rates at this time, the bankers and business people will maintain their own tightness - in this climate they will not lend, borrow, or invest.
I might point out that Germany went through two currency devaluations in 25 years, and that life did go on. However, I can envision an economic meltdown which would be just as devastating as WWIII. If the dollar and the American economy go down, they will take the rest of the world with it. In one sense, America will be on the winning side if there is a default. Debtors will fair better than savers. Those with the most dollars have a vested interest in seeing that the dollar stays strong.