Wednesday, August 04, 2010

Sobering Up: A Policy Advocacy Series By The Institute For Economic Reality

Roman Bacchanalia
(early incarnation of the modern day "Rager")
This entry is the first in a what will hopefully be a multi-installment feature on Clearcut Bainbridge. The Institute For Economic Reality will be exploring and discussing with its vast readership how we can extracate our nation from the current economic clamity of our own creation. This is what you will NOT be hearing from our politicians and wanna-be politicians.

We keep hearing that public policy needs “fresh ideas“ in order to deal with our current financial imbroglio, yet the very people advocating for such “fresh“ ideas are the very ones hell-bent on reliving the past. These hopeless romantics are nothing more than the DJs spinning the top 40, Golden-Oldies of their youth, and the musical metaphor holds especially true since the old policies were hokey when they were new and now they just plain suck. Just as the music from their youth was only good if you were stoned, their economic policies were only good if you were stupid.

Those Americans that are presently in the “tribal elder” role of our society (born before 1955) and who live within the orbit of our modern binary star of stupidity (DC and NYC) have pretty much decided that the rear view mirror is the best place to look to navigate around our financial Tule Fog-40 car pile-up,

Permit me to disagree.

We do not find ourselves trapped in these debt-laden tar pits out of a set of unforeseeable circumstances. Hank Paulson, Tim Geithner, Ben Bernanke, Alan Greenspan, Bonnie Fwank, Dick Cheney, et al have all, in some matter, plead ignorance of how we arrived at our point in history. These are all brilliant men (at least by judging by the perspectus - actual market performance has been disappointing) and they have all been in a position to know the consequences of modern economic policy. To feign incredulity is either a bald-faced lie or gross malfeasance - take your pick.

The Institute For Economic Reality, Kitsap County‘s public policy think tank, saw this coming several years prior to reality intruding on our debt-fueled, arrogance-driven, drunken rampage of unbridled financial idiocy. It wasn’t rocket science, nor was it a lucky guess. Any student of history, basic economics, and public policy is more than sufficiently equipped to understand the problem. It would seem that it takes a stint at a New England degree mill, a career in DC or Wall Street or membership in The NAR NOT to see it coming. That ain’t education folks - that’s brainwashing.

In fact, the ONLY thing that was not entirely knowable in advance was the various government interventions (often illegal) to keep the party going. If you attempted to trade this mess, the only variable you were trading against was the government, which also includes the Federal Reserve (yes, I know…the FED isn’t a government institution, but for the sake of brevity, it will be considered such for the purposes of this analysis).

We can blame the dolts born against the backdrop of WW2 for the problems, and that blame would be well placed. However, to truly lay the blame at the feet of those that are responsible, we need to visit our bathroom mirror. WE GET THE GOVERNMENT WE DESERVE AND THE GOVERNMENT WE DEMAND!!!!

WE have voted and agitated for Washington to give us something for nothing. Politicians love handing stuff out and they hate asking you to fund it. Getting something for nothing is always a big hit with the Great Unwashed and politicians comply.

Back in the Roman days, the Roman government would send their legions out on a conquest binge and the spoils of war (stuff produced by other people) would come crashing into the Empire - something for nothing. Romans would gather on the streets of Rome as the Senate would allow the victorious general to parade his army and all the spoils before the crowd of shrieking Romans in what they called a “triumph.”

That wasn’t enough. Romans were fed and entertained by government edict - something for nothing. It was popular for obvious reasons. One third of Rome were slaves producing great works that were unequalled for almost two millenia - something for nothing.

Modern America has discovered the same thing, but in a different manner. We have generally eschewed wars of conquest and pillage (despite stupid Leftist protestors claims to the contrary), but we have perfected the art of getting something for nothing as far as our economy goes.

We love debt, cheap labor, speculating, and government subsidy. We have pulled money from the future to the present, undercut the domestic labor market, grifted our way to “prosperity,“ and hid the true cost of our addictions - all forms of “something for nothing.” It is these things that are causing our problems and the “tribal elders” among us look in the rear view mirror and give us even more.

Alcohol cures hangovers. Death cures alcoholism.

Just because something has always been done in a certain way doesn’t preclude it from being incredibly stupid, and looking to our recent past (which is the cause of our problems) for a cure to our problems is beyond insane, even for this bunch. I guess when you have a generation of people with minds warped by LSD and clogged with bong resin, you have to expect such results.

Consumption is fun and production isn’t. Everyone loves to hit the mall and nobody likes to go to work. This isn’t new nor has it changed at any point in human history. I love to go to Hawaii, eat at nice restaurants and buy stuff for the kiddies. That’s much more enticing than dragging 140 Whine-O-Matics in and out of Dallas/Fort Worth for 19 days a month while getting a public colo-rectal from the TSA. I’m guessing that my ancestors liked eating codfish, sleeping under reindeer pelts and getting liquored-up on a long winter night, but were probably adverse to building boats, hunting reindeer and growing grain. That would explain why Anglos have blue eyes, as those savage Norsemen found it easier to take the stuff produced by folks in the British Isles than to produce them on the Baltic coast.

Understanding wealth is easy. Producing it is hard. Wealth is the difference between what you produce and what you consume. If your consumption exceeds production, you are in debt, which leads us to one of the foundational maxims of The IER:

Debt is the antithesis of wealth.

If you live in a pimped-out house on Rockaway Beach and the speculative frenzy in local real estate afforded you the opportunity to go to a local debt merchant for a cash-out refi so you can buy a vacation house and a pair of his/her Escalades while sending the next generation of debt zombies to Westsound Academy, you are not wealthy. You are in debt and your future production (claim on wealth) will be taken from you to pay down your egomaniacal shopping spree. You have moved consumption from the future to the present without producing a thing. Negative wealth (from your point-of-view) was created by this action.

The banker that made this dream possible produced nothing, as all he gets is a claim on your future production in excess of what he loaned you, and the merchants who sold you the new plasma TV, Sea-Doo, and cellar full of Three Buck Chuck only had their production go up based upon your premature consumption. They won’t be able to move any more units to you because you have already spent the fruits of that production.

For a real life example of this, see the Detroit auto makers in 2002 and their “60 months, 0% financing” scheme. They flat out busted themselves when that ended. AM radio idiots will blame the UAW for the entirety of the mess, but outside the defined benefit retirement programs, the blame resides with the financial geniuses that forward sold production into a satiated market.

By my count, the only “winner” in this is the debt merchant, Someone remind me what “industry” has seen inordinate growth since the mid-80s. Oh, yeah…Wall Street.

This is a long winded way of saying that going further into debt (official US government policy to deal with this “crisis”) isn’t going to do anything but make the bankers rich at your expense. It is important to note that banking stocks have done well since the various bailout packages were announced. We are deficit spending (pulling forward demand and falsely stimulating production as did GM/Ford/Chrysler in 2002) to the tune of 11% of GDP. All we have to show for it is a paltry 2% growth rate.

Folks, that 11% deficit spending is moving production to the parts of the economy it doesn’t want to flow thus making the eventual realignment of the economy that much more painful. All the Obama-jobs that are being created as a result will eventually disappear and the absent-production that they are papering over will not be present to fuel future consumption.

Even worse, that 11% is with interest and is all coming out of future production. That is AT LEAST 11% of future GDP that will not benefit the contemporary population, which is a textbook way of ensuring the next generation will not surpass previous generations in standard-of-living. Why do I think “respect your elders” isn’t going to be a societal value in the not-too-distant future?

There isn’t anything magical about government “stimulus.” It is nothing more than taking tomorrow’s demand and putting it where it will garner the most votes for the incumbents, ensuring two disastrous outcomes: tomorrow will need even more “stimulus” to keep out of recession and that the cretins that brought you this outcome will still be in power to do it again.

When you are in a hole, drop the shovel.

If debt is the antithesis of wealth, wouldn’t getting out of debt be something that would benefit everyone? Isn’t that the best way to promote “the general welfare?” If what we produce today goes to increase our wealth and consumption, rather than pay off yesterday’s consumption and the interest on that consumption, should that not be a high priority public policy?

Such is the official position of The IER. That’s why getting the debt destroyed by any means necessary is the centerpiece of economic recovery. It will take more than just debt redemption and repudiation to fix our economy, but without climbing out of debt, the rest is just academic filler.

In the next installment, the IER explores how to comport public policy to correct the debt-fueled idiocy weighing down on us. It won’t be pretty or popular, but after the 40 year financial acid trip, it is time for a little economic reality.

Until then, stay solvent.

Ernst Stavro Bloviator,
Senior Fellow, IER

(PS:  I will try to update more than quarterly)