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 because....it 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.”

SEE: http://inflation.us/hyperinflation2015.html

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!