Saturday, March 13, 2010

The Gathering Storm....

How our massive debt, abysmal economic policy and shifting economic fault lines are undermining the Keynesian economic model

Recently James Srodes (the former Forbes Magazine Washington Bureau Chief) wrote a compelling article titled The Great Recession of 2011-2012, in which he outlined the case for a “double-dip recession,” or more aptly a deepening Keynesian trough that is fast approaching.

I’ve said since November of 2008 that “this recession was going to be worse than any we’ve seen in a generation” and that “the worst is yet to come” – in the form of massive public sector layoffs that will impact a huge swath of very spoiled American workers (government/Municipal workers) who’ve never been impacted by such financial vicissitudes before.

The warning signs are all around us, in the news that more and more state and local Municipalities across the nation are looking at shockingly shrinking revenue pools, especially in property taxes (due the devaluation of housing prices across the country) and in places that depend on usually reliable private sector revenues, like New York State and New York City, California and Illinois, with those private sector revenues falling off precipitously the financial crunch in such places is even worse. In response, Municipalities across the country are laying off more and more public sector workers.

Just this week, New York City’s MTA (Metropolitan Transit Authority) announced 1,100 workers layoffs. Other major layoffs are imminent in New York City. The NYPD has already shrunk by almost 2,000 members due to attrition, the Department of Education is facing over 1,000 jobs lost, while the FDNY is looking at closing at least 20 Fire Companies and an estimated 1,000 jobs lost!

All of this is proving those market-based economists, from Rothbard, to Friedman to Becker right and those Keynesian “Public Sector economists,” wrong.

Public sector jobs are NOT as “productive” and “revenue generating” as private sector ones, nor are government deficits and private investment at all “the same in their economic impact.”

In FACT, the entire public sector relies on private sector generated revenues to exist.

As I’ve noted before, if the Keynesians were right that public sector jobs create the same economic effect as private sector capacity and productivity, then Zimbabwe, a nation with HUGE public sector needs, could be transformed, virtually overnight, into an extremely prosperous and productive nation merely by massive public sector hiring!

Of course, the problem is that Zimbabwe doesn’t have the money to pay for that army of bureaucrats lacks the vibrant private sector that would generate the revenues to pay for it.

But it’s more than just the current reality that’s destroying the perceived efficacy of Keynesianism, as if that isn’t enough, but the shifting economic tectonic plates, such as the increased global demand on commodities from oil to precious metals to agricultural products to water, greatly increasing the price of these commodities is making it much harder for today’s entrepreneurs to make money from these resources and that, in turn is undermining the spirit of optimistic generosity that has been a hallmark of the West for over a Century!

Beyond that, and at precisely the worst possible time, the U.S. has gone on a massive spending spree, as its revenues continue to dry up. The result has been a mammoth printing of U.S. currency – more U.S. Dollars have been printed between 2000 and today than were printed between 1789 and 2000!

Worse yet, we have an administration in which its core members have little understanding of basic economic principles and tend NOT to believe that increases in the money supply creates inflation.

Indeed, President Obama has nominated Janet Yellen to be vice chair of the Federal Reserve. That pretty much assures that the “Obama Fed” is going to be very reticent in fighting future inflation and defending the value of the dollar. Janet Yellen subscribes to the Phillips-curve model that trades off unemployment and inflation, or in the words of Larry Kudlow, “rather than seeing excess money creation as the cause of rising prices, she focuses on the unemployment rate, the volume of new jobs being created and the growth of the overall economy.”

Apparently Ms. Yellen believes that inflation is caused by too many people working, wages and prices rising, and in short, too much prosperity, which is akin to the old 1970s model that blamed inflation on “Union-driven pressure for higher wages, resulting in higher prices for goods and services."

Unfortunately, that’s NOT what causes inflation at all. In FACT, that’s a response TO inflation!

Inflation IS the devaluation of the currency by printing/creating an excess of it. The clamor for higher wages, amidst rising prices for goods and services is merely the RESULT or RESPONSE TO inflation. In other words, BOTH rising prices and wages are SYMPTOMS of the DISEASE of government printing too much money.

The stars are aligned for a near “perfect storm” for America. As commodity prices, the cost of water, energy and the materials we need to produce and prosper rise amidst the burgeoning industrialization and the subsequent growing competition for all those things, America has buried itself deep in debt, making it vulnerable to creditors who can wreak economic havoc on us at any time by merely raising the cost of servicing our enormous debt.

To make matters even worse, our economy, already reeling from a Keynesian (government micromanaging the mortgage market) disaster, has embarked on a “new path” of HYPER-KEYNESIANISM, which has already seen the unemployment rate shoot up to 10%, with the potential for devastating inflation and sky-high interest rates not seen in nearly three decades looking more and more imminent by the day. According to the National Inflation Association (NIA), “We are now at a point where if the U.S. government taxed Americans 100% of their income, the tax receipts generated would not be enough to balance the budget...The White House is not projecting interest payments on the national debt to break the $500 million mark until fiscal year 2014...By then, even if we go by White House projections that the deficit will be cut to $828 billion in 2012, $727 billion in 2013 and $706 billion in 2014, in 2014 we will still be looking at a national debt of over $18.5 trillion with a public portion of around $13.14 trillion...NIA believes the real rate of U.S. inflation to already be approximately 5%. If the Federal Reserve doesn't raise the federal funds rate to above 5% in the short-term, in our opinion, an outbreak of double-digit inflation is inevitable. By 2014, it is possible the Federal Reserve will be forced to raise the federal funds rate up to above 10% and the public portion of our national debt could exceed $15 trillion. Therefore, in 2014 we could see the interest payments on our national debt reach $1.5 trillion, about triple what is currently being projected and 43% of the government's projected tax receipts that year of $3.455 trillion...NIA believes hyperinflation is possible by the year 2015. Besides the rising interest payments on our national debt, another major catalyst for hyperinflation will be social security payments, which adjust to the CPI-index. As the government's CPI-index rises, so will the social security payments that it owes. This could cause a death-spiral in the U.S. dollar.”


Disastrous ideas and ideals have disastrous consequences and just as it appears that our misguided “anti-terror policies” will have to lead to a mass casualty event before most of America really wakes up, it increasingly appears like its going to take a massive economic implosion, complete with the already growing public sector dislocation to wake Americans up to the disaster that Keynesian policies really are!


WomanHonorThyself said...

the entire public sector relies on private sector generated revenues to exist...exactly my friend but the socialist?Marxists dont care!!!!

JMK said...

Well, that realization is starting to dawn on a LOT of people who never thought about such things, Angel.

And more people will be forced to understand it by the immutable laws of economics, which are as ineluctable as the law of gravity.

Skunkfeathers said...

The building disaster of Obama and the libtard-controlled CONgress is going to hit a broad spectrum of folks right square in the eyes.

He may well prove to be a one-term president, but the damage he, Bela Pelosi and the Zombie Reid are doing, will be felt for a generation, at the least.

JMK said...

"He may well prove to be a one-term president, but the damage he, Bela Pelosi and the Zombie Reid are doing, will be felt for a generation, at the least." (SF)

At the least.

They're all betting this will be a "transformative" administration. They're betting that if they get enough of the American people hooked on government programs and enough NOT paying any income taxes, that number's been growing steadily FROM about 31% in 1986 (after the Bill Bradley "tax reforms" went into effect) to over 37% today!

The Leftists feel they're CLOSE, very close. They believe that eventually a "tipping point will be reached and that will signal "the point of no return" on the road to serfdom.

I'm betting, based on what I believe to be superior calculations, that the bottom falls out of the economy BEFORE that "tipping point" is reached.

Moreover, it only took 3% of Americans to effect the American Revolution. At one point, less than a year before the British surrendered at Yorktown, there were nearly twice as many American Torries (supporters of the Crown) fighting for the British than there were American revolutionaries under arms.

I believe liberty will be resurgent either by fiscal implosion, mass upheaval, or via arms....but it WILL be resurgent.

Seane-Anna said...

This is scary info, JMK! It's time for INDIVIDUALS to start preparing NOW for the worst, and not wait on governmentn to save them.

No matter what our faith, we should take a closer look at the Mormon practice of "provident living", which is basically a lifestyle of preparedness, such as stockpiling a year's supply of food. And I'm going to brush off my old copies of "The Tightwad Gazette" and "The Art and Science of Dumpster Diving". Yes, "The Art and Science of Dumpster Diving". Seriously.

JMK said...

"It's time for INDIVIDUALS to start preparing NOW for the worst, and not wait on governmentn to save them.....No matter what our faith, we should take a closer look at the Mormon practice of "provident living", which is basically a lifestyle of preparedness, such as stockpiling a year's supply of food. And I'm going to brush off my old copies of "The Tightwad Gazette" and "The Art and Science of Dumpster Diving". Yes, "The Art and Science of Dumpster Diving". Seriously." (Seane-Anna)

It really IS a scary forecast, Seane-Anna.

With the appointment of Janet Yellen, an economist who doesn't seem to see inflation for what it actually is - the government printing excessive amounts of currency and thereby debasing its value.

Nixon's Fed chief believed the same and with disastrous effects.

Nixon proudly asserted, "We are ALL Keynesians now," and followed LBJ's spendthrift ways with even more spending and regulation!

A lot of people forget that it was the "Moderate"/liberal Republicans who were the original Keynesians.

Herbert Hoover was the "Jimmy Carter of his day." He began most of the "alphabet soup" that FDR built the New Deal on.

One immediate thing anyone can do in advance of inflation is to put some money into precious metals, because they keep their value relative to inflation.

A 1 ounce gold coin could buy a hand-tailored three piece suit back in 1930, when gold was about $20/ounce, today, at around $1100/ounce will still buy that same suit.

That's why real estate is also a hedge against inflation, for as the money supply increases (and prices and wages right along with that, although workers always lose out for wages rarely keep pace with inflation) you're paying back that mortgage with "cheaper dollars."

That is, an $2500/mth mortgage right now, will seem like nothing after say, 8 years of 8% to 10% inflation, as that will severely debase the currency.

After say 8 years averaging 8% inflation, goods and services will rise in price by about 2/3s, incomes will also rise but historically by a significantly smaller margin, maybe 40% - 1997, an article in a local paper explained that a New York City cop or fireman earning $12,000/year back in 1972 had 30% MORE purchasing power than one earning $72,000/year in 1997 dollars!....And between 1972 and 1997, there were but about 8 years of very high 8% and above inflation!

But consider that an average house in Staten island or Queens NY cost around $40,000 in 1972, but by 1997, the average house price in those areas was well over $300,000 in those same areas!

That's the REAL advantage of home-ownership, as the value of property increases, relative to inflation, you wind up both earning MORE income and paying a mortgage bill that shrinks in value to the debasing currency.

By even 1980, that person who bought a $40,000 on Staten Island, now had a house valued at around $100,000 and was earning more than double what they earned in even though that person's overall purchasing power had gone down, they were now paying back a mortgage payment around $250/month (based on a $40,000 cost at 8% with 20% down) while earning significantly more in income....police and fire salaries in NYC more than doubled over that 10 year period!

So real property and precious metals are traditional hedges against inflation.

JMK said...

Today, with gold over $1,000/ounce, many have turned to silver, which at $17/ounce also rises with inflation AND both has more industrial uses and thus greater functional demand and much of the silver above ground has been depleted over the last century.

Some commodities brokers believe silver should be at $200/ounce even NOW.

Of course, the question is, "How much silver is (relatively) easily accessible under ground and can the silver market be flooded with product quickly should prices rise?"

The problem inherent in commodities trading is that there are so many variables, many of them (like weather) are uncontrollable. Add to that the always unpredictable "human element" or "the psychology of the market," and speculating on commodity prices is a dicey proposition at best.

Often there are many "unintended consequences" that either knowledge or lack of knowledge of all the variables in play, result in.

That is, you can make mistakes (poor determinations) based on full knowledge, though with consequences you didn't expect....OR based on insufficient knowledge or data.

Still, all things considered, personally, I'd go with modest silver purchases right now, which I've been doing....not all that much, just a slight hedge.

Anonymous said...

We have the problem that we put those Socialistic people in charge. Now that we are waking up, we have to stay in control of this and put a stop to all this. It is like Angel said....the entire public sector relies on the private sector. Care or not, the Marxist people will find soon as they run out of everyone else's money. And that is coming. Great post sir.

JMK said...

"Care or not, the Marxist people will find soon as they run out of everyone else's money. And that is coming. " (WC)

Sad to say, you're 100% correct.

So was Margaret Thatcher who presciently said, "REALITY is Conservative," by which she meant that the harsh realities of the world (lack, loss, limitation) are best dealt with via the creativity unleashed by the free market.

The Command/government-run Economy, even the modern Corporatist one, which is fundamentally a "Government-controlled/managed economy" also known as the "political economy" does not work and usually leads to massive poverty and deprivation.

The only question here is, "How bad do things have to get before the majority of Americans see that light?"

If the USA loses its AAA rating, servicing on our debt will rise to unprecedented and untenable levels and we will see massive "social dislocation"...a nice term for widespread civil unrest.

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