Will 'Self-Preservation' Work After Decades of Fiscal Suicide?

Thanks to Federal Reserve Chairman, Ben Bernanke, U.S. governments, businesses and citizens were totally unprepared for the current economic collapse. It was Bernanke who first told Americans that he and the other banksters had created a “Goldilocks economy” where stock and home prices would always go up and never go down, and jobs would be plentiful.

Then, when the magnitude of the U.S. housing “bubble” grew large enough for all to see, Bernanke promised America a “soft landing” - vowing that when the largest asset-bubble in history burst that it would have virtually no impact on the U.S. economy.

As a result of Bernanke's lies, businesses, citizens and governments must now make drastic adjustments to their budgeting and related spending decisions. These difficult choices all have repercussions. Not only do the consequences of these decisions have negative impacts on other players in the U.S. economy, but many of the short-term, necessity-driven decisions made by various entities today have negative, long-term impacts on themselves.

U.S. citizens are the most-indebted people on the planet. Thus, over the short-term, as a matter of survival, Americans must dramatically curb their spending to pay down their debts to a level which doesn't threaten them with imminent bankruptcy.

Yet, with 70% of the U.S. economy dependent on consumption (and thus 70% of the jobs, as well), as Americans make necessary reductions in their debt-levels this reduced spending will inevitably cause the loss of vast numbers of jobs in the retail sector. Therefore, someone reducing their personal debts to help improve their financial picture may very well contribute to their own loss of employment (and financial ruin) in doing so.

As for the retailers themselves, they have already noted this “generational shift” in U.S. consumer behavior (see “The Death of the U.S. Consumer Economy”). With the U.S. retail sector having an absurd amount of excess capacity given the long-term decline in spending which has just begun, these companies have little flexibility.

They are planning on dramatically reducing the number of retail outlets they operate in favor of shifting to more “online retailing” - the only segment of the retail sector which has not been devastated by declining sales (apart from Wal-Mart (WMT)). This inevitably means vast numbers of lay-offs for U.S. retailers.

The problem with this strategy is that every lay-off eliminates one more consumer still able to consume at close to previous levels. Thus, the more that retailers scale-back into online sales to cut costs, the more they reduce the spending power of the consumers who support their businesses. This is a self-reinforcing downward spiral – which the U.S. government has not even begun to address.

Indeed, with their knee-jerk response to the crises which are occurring on various fronts, on a regular basis, the U.S. government often hurts one group when it tries to help another. It's “Cash-for-Clunkers” program had an immediate (if temporary) positive impact for U.S. automakers.

However, getting the most-indebted people on the planet to go further into debt – to purchase a “big-ticket” item like a car has some very powerful, negative consequences. To start with, the consumer dollars which went into these automobile purchases immediately reduced the amount of spending these same consumers are doing with all the rest of the American retailers.

Meanwhile, many of these car-buyers will end up defaulting on their car loans, adding to the grossly excessive supply of used cars in the U.S. market. And, as even the “experts” acknowledge, many of the cars purchased today will directly subtract from purchases which would have been made in 2010. Thus, while Ford (F) boldly announced plans to increase production, a Cash-for-Clunkers “hangover” is already guaranteed to negatively impact these companies next year.

Furthermore, “Cash-for-Clunkers” is already seeing reduced demand from Americans, despite the fact the U.S. government just tripled the amount of money they are throwing at this problem. There simply are not that many Americans ready/willing/able to indulge in the purchase of a new automobile right now.

Worse, Americans will be making payments on these new cars for years, meaning that the money which disappeared from general retail spending in July is gone. While manufacturing automobiles requires a lot of labour (and thus jobs), retail sales of cars is not very labour-intensive compared to many other forms of consumer spending. Thus, this small, one-time boost to the U.S. manufacturing sector has a significantly negative long-term impact on the entire U.S. retail sector.

As has been widely reported, U.S. banks are cutting credit-limits, reducing lending, and “tightening the screws” further on Americans by increasing the size of minimum payments on credit card balances. Putting aside the fact that only complete idiots carry significant credit card balances, these efforts at “self-preservation” hurt everyone – including the banks themselves.

Reducing credit to a consumer economy which is addicted to credit obviously has negative repercussions – part of the same vicious circle described earlier. With U.S. consumers forced to spend less through the dramatic reduction in available credit, this reduced spending means large numbers of job-losses, with those losing their jobs becoming the most likely candidates to default on the numerous categories of debt held by U.S. banks.

Thus, as banks try to “protect” themselves through restricting credit, they create large numbers of defaults – translating into even more losses on their balance sheets, and at a time when all categories of loan-delinquencies are already at all-time records.

In the devastated U.S. housing sector, “self-preservation” is also producing (or will produce) its own series of unintended consequences. With virtually all U.S. home-builders threatened with bankruptcy, and sales of higher-end homes completely evaporating, all U.S. home-builders rushed into the low-end housing market (primarily through apartments/condominiums) – at the same time.

The result of this flight-of-the-lemmings is that for well over a year, every month U.S. home-builders have been starting construction on (at least) 50% more homes than they are selling. Increasing inventories in the most over-supplied housing market in history threatens the survival of all these home-builders – both individually and collectively.

Then there are the retiring U.S. baby-boomers, who are suddenly discovering that their retirements are severely under-funded. This shortfall can only increase dramatically as the U.S. government cannot pay any of the unfunded $70 trillion in entitlement-programs – which these same baby-boomers planned on leaching from their children and grandchildren.

With real estate comprising 75% of the assets of these baby-boomers, dumping real estate (year-after-year, decade-after-decade) is their only option. With over 20 million empty homes across the U.S., there is an endless supply of homes – all aimed at a tiny portion of Americans capable of being future buyers in this shattered economy.

This is the inevitable outcome of running a “Ponzi-scheme economy”, where mountains of leveraged debt can only be stabilized by mountains of new debt to allow borrowers to (temporarily) continue to make payments on debts they will never pay off.

As has been frequently pointed out by one-time laughing-stock, Peter Schiff (and many other non-mainstream commentators), you cannot solve economic problems caused by recklessly excessive borrowing-and-spending by engaging in even more reckless borrowing-and-spending.

“Self-preservation” actions are more than offsetting efforts by the Obama regime to re-inflate this Ponzi-scheme. The only path to financial health for Americans (and the United States, as a whole) is to dramatically ratchet-down spending and debt-levels – which can only occur over a period of many years.

The problem is that this “deficits don't matter” economy was based upon the foundation of ever-increasing debt. As with all other Ponzi-schemes, the U.S. economy cannot be fixed.

While individual actors may be able to save themselves as the “Titanic” goes down, the sinking of the U.S. economy is as inevitable as that ill-fated cruise ship. Attempts to avoid this certain fate can only make matters worse.

For those who believe that nothing could be worse than default on the national debt, I urge people to study the examples of other doomed economies which tried to avoid an inevitable fate – invariably through more reckless borrowing, followed by even more reckless money-printing. This inevitably means hyperinflation: the reduction of the value of currency to zero, followed by national default.

The United States is already confronted by total public and private debts which exceed $56 TRILLION. This mountain of debt is much too large to even be serviced by this relatively puny economy – as demonstrated by the fact the U.S. government is already forced to print money just to pay the interest on its debt.

Add in the additional $70 trillion (or so) of additional “unfunded liabilities”, and the question immediately shifts from “if” the U.S. will default on its debts to “when” it will default on its debts.

It's a matter of elementary logic that a nation which has to print money to pay interest on its current debts (while borrowing more money at a faster rate than any time in history) cannot possibly reduce future spending by $70 trillion. Even if this was spread out over thirty years, this would mean cutting spending by more than $2 trillion per year.

After decades of fiscal suicide, it is efforts at self-preservation which cement the fate of the U.S. economy. However, with a Ponzi-scheme economy which is now suffering the fate of all Ponzi-schemes, self-preservation is the only strategy left for Americans.

Comments

[The Geoffster:]

If "self-preservation is the only strategy left for Americans," it stands to reason that self preservation is the only strategy left for America. Chap 08 presents a sensible plan but our leaders are politicians not philosopher statesmen. Their first principal is reelection. Under a Republican administration, I would expect a pretext to war. Obama may choose this option if we experience another attack on American soil. He is already escalating in Afghanistan. Absent a casus belli, the administration will push for massive New Deal type programs. Inflation and default are inevitable under either scenario.

Aug 17 10:12 AM

[chap08:]

Hi TeresaE

in response:

1. There is no free lunch. There will be pain whatever we do. Let's distinguish between what's possible (e.g. my plan) and what is totally unsustainable (e.g.our consumerism and our trade deficit).
2. Speaking of lunches, I travel around the world. I see many countries, poorer than us and with more sustainable exchange rates. In those countries people are not starving. They have underwear (I think), shoes and medicine. It is reasonable to infer that we will not starve and go without underwear and medicine. We will have to spend a higher proportion of our income on basics, yes, but the evidence suggests that this is perfectly possible. If there is one country that has spent too much on luxuries, it is us. It is a question of priorities. We have to start paying a reasonable price for our imports and allowing our exporters to compete internationally.
3. Another benefit of my plan is that we will not do such stupid things as importing 70% of our food from China. How can this possibly be a sensible use of resources (including oil)? Also, we'll be a bit better prepared if, at some stage, China get a bit cross with us.


On Aug 17 09:40 AM TeresaE wrote:

> You have a decent plan, except for reality of #2 and #3.
>
> Do you know that 70% of our food comes from China?
> Nearly 90% of our socks, shoes and underwear?
> Or how about the fact that over 70% of our over-the-counter first-aid/health
> products
> And over 50% of our pharmaceuticals.
>
> So, devaluing the dollar will not lead to #3, "moderate inflation".
>
>
> It WILL lead to food and medicine becoming completely unaffordable
> for the majority of our citizenry.
>
> Which will then shoot #1 in the foot.
>
> Reality. The other truth.

Aug 17 10:25 AM

[Jeff Nielson:]

Chap08

The problem is that the U.S. economy has degenerated past the point where it can be fixed by BELATEDLY adopting responsible policies. As I wrote, the U.S. economy is now a complete "Ponzi-scheme" economy - and no Ponzi-scheme can be unwound at such a late date.

Point by point:

1. You can't cut $3 trillion per year (or more) from government spending without wiping out millions of Americans dependent on them - especially the over-priced, under-performing U.S. heath-care system.

2. The U.S. has no control over the future of the dollar. It's going to zero over the longer term, with the only uncertainty being how much longer before it starts plummeting downward in an uncontrolled manner.

3. As others have pointed out, the coming collapse of the dollar means runaway-inflation (and likely hyperinflation), and again the U.S. government has little to no control over these events.

4. "Regulation" of the U.S. financial crime syndicate is again "too little too late". These oligopolies must be smashed into little pieces - since the oligarchs currently OWN your government.

5. You and a vast chunk of the U.S. population grossly underestimate the impact of the largest mountains of debt in human history. It is impossible for an economy to have ANY real growth when a HUGE portion of economic output goes into SERVICING its debts.

The sooner that Americans realize their economy (and their government) are past the point of being "fixed", the sooner they can develop a plan of action to try to survive this economic collapse - on an individual basis.


On Aug 17 07:02 AM chap08 wrote:

> You have probably grabbed your guns and run for your cabin in the
> woods by now. But if you're still there, let me give you some perspective.
>
>
> Firstly, you are right about much of this. To sum it up we have over
> consumed, lived irresponsibly and become grossly over indebted. We
> are a greedy, wasteful, spoilt, fat nation and the repo man is comin
> callin. This is all true. However, more selfish behaviour like "self
> preservation" is not the way forward.
>
> This is the way forward:
>
> 1. Long term cuts in government expenditure. Cuts are a necessary
> part of any plan. As a nation, we have lived beyond our means and
> must accept a lower standard of living for a while. However, that
> doesn't mean that we should make drastic cuts now - that would be
> a mistake. Pro-cyclical deficits during the boom years were a suicidal
> error - hopefully everyone understands that now. That doesn't mean
> that deficits are always wrong. Counter-cyclical deficits are inevitable
> and necessary. We need them now, but only as part of a long term
> plan for debt reduction.
>
> 2. Devalue the dollar. This will help our trade deficit, our deflation
> problem and our debts. Will we be worth less against the rest of
> the world? Yes, and rightly so.
>
> 3. Encourage moderate inflation. This is necessary for a number of
> reasons, e.g. having control over real interest rates. It will also
> help us to gradually erode our debt burden. Defaulting on our national
> debt would be massively deflationary and throw the world in to chaos.
> It is a non starter. The Fed may need further extraordinary action
> to achieve inflation, but it can and will be done.
>
> 4. Regulate the banks. Banks occupy a unique position in a capitalist
> economy. They can not just be left to the free market. History has
> shown us that before, and now it has shown us that again.
>
> 5. Let the free market do most of the rest. I think that you under
> estimate America's capacity for regeneration. Elsewhere on SA people
> are saying how easy it will be for China to rebalance towards a consumer
> society. Well, if that's so easy, how come its so hard for us to
> rebalance towards a productive one? The reality is that neither is
> straight forward, but both can be done. Let the entrepreneurial spirit
> free and things will work out a lot better than you think.

Aug 17 10:51 AM

[chap08:]

Jeff, thanks for your reply. Let me try and respond briefly. The core of it is that, while I agree that our debt is a huge, huge problem, I don't see it as an unsolvable problem.

1. I don't think that you need to start by cutting $3 trillion (you couldn't). What you need to do is reverse the trend. All that you need to start doing that sensibly is start cutting 10% (say) from budgets and keep compounding. This is perfectly possible. Ask the Canadians, they actually did it. I've done this in businesses where the existing management say that it is impossible - it always is possible. This is how to do it without wiping out millions of Americans.
2. If you say that the dollar goes to zero, then our debts go to zero. You can't have it both ways.
3. There is no evidence to say that hyperinflation is inevitable.
4. Basically agree with you, so lets do it.
5. As I say, I really do see debt as a huge problem - but believe that it can be solved by the approach in "1". The world will not cut off our credit if we have a sensible debt management plan. This will give us the space to get debt service costs under control and gradually reducing as a % of gdp.


On Aug 17 10:51 AM Jeff Nielson wrote:

> Chap08
>
> The problem is that the U.S. economy has degenerated past the point
> where it can be fixed by BELATEDLY adopting responsible policies.
> As I wrote, the U.S. economy is now a complete "Ponzi-scheme" economy
> - and no Ponzi-scheme can be unwound at such a late date.
> etc.
>

Aug 17 11:52 AM

[Darrell:]

Jeff is correct, America is fast approaching the point where central bankers will no longer accept the dollar as legal tender; once this happening occurs, our policy wonks will no longer be in charge of their own destiny, their focus will be on getting the best deal possible.

Before the dollar goes from a global currency to a national currency, I expect interest rates to go up dramatically, budget management a priority, and the Americans to finally understand that it is earnings, and not money production, that creates wealth and fuels prosperity.

Aug 17 12:37 PM

[Jeff Nielson:]

Chap08, your reasoning is sound, but the magnitude of U.S. debt is so much larger than any debt-mountain in human history that to make "economic salvage" possible requires massive, IMMEDIATE cuts in spending - not ADDING trillions more in debt, and THEN trying to cut.

Being Canadian, I'm very familiar with the remarkable fiscal-turnaround engineered by our Liberal Party government.

First, Canada's debt crisis was (at worst) about 1/3 as bad as the current U.S. nightmare. Second, apart from health-care, there were no "sacred cows" in Canada's annual budget - so we could eliminate ALL non-productive spending.

Is the U.S. prepared to cut 3/4 of a TRILLION per year in defense spending? Is it ready to cut off the $100+ billion per year in agricultural subsidies to the EXTREMELY powerful farm-lobbyists?

Is it ready and willing to radically cut Social Security and Medicare benefits to seniors - and get the even MORE powerful AARP angry?

Even if I were to concede that it was still mathematically possible to salvage the U.S. economy (and I don't), it is POLITICALLY impossible for these bought-and-paid for U.S. politicians to turn on their "owners".


On Aug 17 11:52 AM chap08 wrote:

> Jeff, thanks for your reply. Let me try and respond briefly. The
> core of it is that, while I agree that our debt is a huge, huge problem,
> I don't see it as an unsolvable problem.
>
> 1. I don't think that you need to start by cutting $3 trillion (you
> couldn't). What you need to do is reverse the trend. All that you
> need to start doing that sensibly is start cutting 10% (say) from
> budgets and keep compounding. This is perfectly possible. Ask the
> Canadians, they actually did it. I've done this in businesses where
> the existing management say that it is impossible - it always is
> possible. This is how to do it without wiping out millions of Americans.
>
> 2. If you say that the dollar goes to zero, then our debts go to
> zero. You can't have it both ways.
> 3. There is no evidence to say that hyperinflation is inevitable.
>
> 4. Basically agree with you, so lets do it.
> 5. As I say, I really do see debt as a huge problem - but believe
> that it can be solved by the approach in "1". The world will not
> cut off our credit if we have a sensible debt management plan. This
> will give us the space to get debt service costs under control and
> gradually reducing as a % of gdp.

Aug 17 12:43 PM

[Tony Petroski:]

Mr. Nielson: Calm down.

The author: "To start with, the consumer dollars which went into these automobile purchases immediately reduced the amount of spending these same consumers are doing with all the rest of the American retailers."

I thought the author was a Keynesian. Shouldn't the auto dealers and salemen produce the much-vaunted "multiplier effect?"

Aug 17 12:55 PM

[TeresaE:]

I'm tore between up or down with you.

You make valid points, but still miss a lot.

Like how a family can pay for food AND pay for forced health care AND Cap & Trade.

I foresee dark, cold houses with hungry people and empty stores.

Wonder where the "income" will come in to pay for any of it?


On Aug 17 10:25 AM chap08 wrote:

> Hi TeresaE
>
> in response:
>
> 1. There is no free lunch. There will be pain whatever we do. Let's
> distinguish between what's possible (e.g. my plan) and what is totally
> unsustainable (e.g.our consumerism and our trade deficit).
> 2. Speaking of lunches, I travel around the world. I see many countries,
> poorer than us and with more sustainable exchange rates. In those
> countries people are not starving. They have underwear (I think),
> shoes and medicine. It is reasonable to infer that we will not starve
> and go without underwear and medicine. We will have to spend a higher
> proportion of our income on basics, yes, but the evidence suggests
> that this is perfectly possible. If there is one country that has
> spent too much on luxuries, it is us. It is a question of priorities.
> We have to start paying a reasonable price for our imports and allowing
> our exporters to compete internationally.
> 3. Another benefit of my plan is that we will not do such stupid
> things as importing 70% of our food from China. How can this possibly
> be a sensible use of resources (including oil)? Also, we'll be a
> bit better prepared if, at some stage, China get a bit cross with
> us.

Aug 17 01:55 PM

[Rich from W...:]

Of course we can cut spending. First off, cut half of the defense budget. We no longer get economic benefit from our armed forces anyway. What good is it to us economically if Iraq is ruled by the Sunni, the Kurds, Saddam, or the Shiites? Let alone the Heroin Homeland aka Afghanistan. We will need a GI Bill for soldiers who are cut involuntarily.

Next we cap medical payments per person per lifetime, just as private insurers all do. Most of it is wasted by the system - the Mayo clinic provides better care for 1/2 the cost of the system in general. Another huge waste is the expense of prolonging life for the utterly disabled. It is sad, but economically, we cannot afford it.

Next we adjust Social Security so it pays for itself. Actually it is only a few percent out of whack. Check the numbers and do not fall for the scare tactics. (Of course, the fact is, we already spent all the past receipts and instead, the Trust Fund holds US bonds.)

Next we rollback taxes to 1960 levels as a percentage of disposable income. This would be a huge increase on the wealthiest, because their disposable income has tripled while most Americans watched disposable income stagnate or fall. Total tax revenues would increase dramatically.

And bingo! The federal budget is balanced. All the "workers" getting paid to do useless work (nursing the brain-dead, building unneeded jet aircraft, etc.) will have to do something productive, and there will be pain of course. All the corporations making profits from useless activities will not make those profits, and that's more pain.

But any addict will tell you that it hurts when you break an addiction.

Aug 17 01:56 PM

[5142152-337:]

Great article, Jeff! Thanks!

Wow! That "Clunker" program is REALLY working, huh?

Lets see, 8 out of every 10 cars sold under this plan has either a TOYOTA or a KOREAN nameplate! NO, repeat, NO Obama cars are anywhere near the Top 10. No GM, etc. Too bad O'mama, you screwed up AGAIN!

To make this even more dicey, the government is having to HIRE tons more help because they are backlogged in paying the car dealers who are in excess of 3 million bucks behind on getting their $$$ from O'mama.

Oh yeah, the government can manage health care...hahahahahahahaa...

Aug 17 02:00 PM

[chap08:]

OK Jeff, I'm staggering out for the last round here.

In 2010, we will have a federal budget of $3.6 trillion and a deficit of $0.9 trillion. Just simplifying around those figures, if we make real cuts of 5% pa, then within 5 years we're in to surpluses rather than deficits. I know it's not quite that simple, but it illustrates that it can be done. Our creditors will easily allow us to go that long, Japan has shown that. Once you've got there, you keep going. You're growing gdp, you're inflating the debt away at say 3% pa. Pretty soon the problem is small.

Probably the reality is harder than those numbers suggest. Probably we will need cuts to mandatory spending and tax rises. But the point is - it can be done.

The real problem is your point about the politicians - a very valid point. I guess they're not going to do what can be done until there is a crisis - a real crisis.


On Aug 17 12:43 PM Jeff Nielson wrote:

> Chap08, your reasoning is sound, but the magnitude of U.S. debt is
> so much larger than any debt-mountain in human history that to make
> "economic salvage" possible requires massive, IMMEDIATE cuts in spending
> - not ADDING trillions more in debt, and THEN trying to cut.
>
> Being Canadian, I'm very familiar with the remarkable fiscal-turnaround
> engineered by our Liberal Party government.
>
> First, Canada's debt crisis was (at worst) about 1/3 as bad as the
> current U.S. nightmare. Second, apart from health-care, there were
> no "sacred cows" in Canada's annual budget - so we could eliminate
> ALL non-productive spending.
>
> Is the U.S. prepared to cut 3/4 of a TRILLION per year in defense
> spending? Is it ready to cut off the $100+ billion per year in agricultural
> subsidies to the EXTREMELY powerful farm-lobbyists?
>
> Is it ready and willing to radically cut Social Security and Medicare
> benefits to seniors - and get the even MORE powerful AARP angry?
>
>
> Even if I were to concede that it was still mathematically possible
> to salvage the U.S. economy (and I don't), it is POLITICALLY impossible
> for these bought-and-paid for U.S. politicians to turn on their "owners".
>

Aug 17 03:44 PM

[Economic Lens:]

Let us revisit this problem in 2011 and remember 2009 as the good times. The worst is yet to come.

Aug 17 06:11 PM

[Economic Lens:]

For America to recover the dollar has to collapse. We have to be unable to import anything and rely on manufacturing within America again. Only when we rebuild our manufacturing base will America pull out of this problem. Of course we could always go to war and put a few million men to work. I am afraid that is the easy solution for our government.

Aug 17 06:16 PM

[dragonpaw:]

70% of our food from China??!!
Where the hell are you getting these numbers?
Are you now buying everything in cans?
Hecho en Mexico, maybe:produit du Chine?!; not here in the mid-west; not yet anyway.
Sorry you coasters are suffering sooo!!!

Aug 17 10:02 PM

[perceptions...:]

The process of leverage works well in an economy that is growing.

However, in line with Newton's theory on gravity, what goes up, must come down!

There have been 3 major economic drivers of growth, over the last 200 years, Population Growth, Oil (cheap & abundant-the economic enhancer) & Innovation.

Two of those three, have already Peaked.

Like gravity, America is not exempt from the laws of econmics, the Demand & Supply twins.

Demand, has recently (2005) started to fall, as the Baby Boomer generation transition from the Peak Earning/Spending years, thru to thrifty retirees, before leaving us forever.

Supply, has Peaked recently (2005) , as Global Oil looked over the other side of the Hubbert bell curve and commenced the long held certainty of depleting production levels, thus stressing the economy with building costs.

In addition, the unfunded costs of an aging Boomer generation are now also set to play havoc, via increased social security & medical expenses, over the next 20 years, adding Trillions more to budget deficits.

So, in the face of no significant INNOVATIONS, I am calling an end to the "exponential Econonmic Growth Fairy" is no more, it died of natural causes, in 2005.
RiP

Aug 17 11:23 PM

[Deven Patel:]

Nice article. But has anyone thought that the basis of monetary value is that which is flawed.

We are in continuous cycles of inflation and deflation. Interest rates, money supply, stimulusus..etc are constantly being varied to fend off these pressures. But these cycles are the basis of our current demise.

No matter what one does, nothing positive will come out in the long run. We will keep defering the problem, because that is the basis our current models being applied.

The "Super Leaders" will have to emerge to re-classify and CHANGE the whole economic model. This is where the challenge will come from.

This is the start of my short discussions.

Aug 18 05:00 AM

[Davewmart:]

Jeff, I do not greatly disagree with some of your conclusions, and because of this would caution you to be careful of hyperbole and unsubstantiated data.
Others have mentioned US food imports, but this statement is also incorrect:
'U.S. citizens are the most-indebted people on the planet. '
At least the citizens of the UK to my knowledge have greater indebtedness.
You weaken your case and invite rebuttal by this sort of loose statement.

Aug 18 06:47 AM

[H. T. Love:]

On Aug 17 03:44 PM chap08 wrote:

><snip>

> The real problem is your point about the politicians - a very valid
> point. I guess they're not going to do what can be done until there
> is a crisis - a real crisis.

Hm. I thought we had one of thase last year. And we got ATRP to remove toxic assets. And then it was used to bail out GS (via AIG) and the other biggies, while leaving the toxic assets in place. And then political coercion was applied to FASB so that those biggies could lie about the value of those assets. And then we let the big IB convert to bank holding companies so they could access the government largesse and be subject to more stringent regulations. And then GS kept doing what they always did (big-time trading) putting their VaR way out of wack with regulatory guidlines and so far not even a "slap on the wrist" for them.

That takes care of just banking portion of that "crises".

On the economic side, they immediately determined that to get the drunk sober he needed more liquor and tried to convince him to accompany them to the local bar, where he could get drunk, on the tab of course. But the drunk resisted (so far).

So, do you really think they will do what can be done, even if there is another "real crises"?

You have more faith than I. This fix can come from only one place - the citizens. They have the control if they choose to exercise it. Our constitution gives us multiple remedies, even for when government becomes to egregious.

At some point, "fight or flight" response kicks in.

HardToLove

Aug 18 07:57 AM

[mna:]

Excellent commentary. Exactly the way we should go about it.
#1 is the fundamental cause of the problems in the US. Inefficient allocation of resources to the Military, Social programs, farm subsidies, Union subsidies are the core causes of US government inefficiency (note how both the political left AND right are responsible for the irresponsible spending). However, each of these are deeply entrenched in the US political system, therefore #1 will never happen because of existing political structure.

Which means #2 and #3 (inflation) are the only politically palatable road. Problem is, Inflation is a tough animal to balance.... It's doable, but I don't have complete confidence they can do it right. I still don't think hyperinflation is in the cards yet (high inflation will be definitely there, however, I'd guess around 10-14% annual, starting in 1-3 years). If they don't get spending under control by the time strong inflation comes up, it'll be hyperinflation time. Of course, they can always increase taxes too, but I don't know how effective that will be if it's only aimed at the top 1% again.


On Aug 17 11:52 AM chap08 wrote:

> Jeff, thanks for your reply. Let me try and respond briefly. The
> core of it is that, while I agree that our debt is a huge, huge problem,
> I don't see it as an unsolvable problem.
>
> 1. I don't think that you need to start by cutting $3 trillion (you
> couldn't). What you need to do is reverse the trend. All that you
> need to start doing that sensibly is start cutting 10% (say) from
> budgets and keep compounding. This is perfectly possible. Ask the
> Canadians, they actually did it. I've done this in businesses where
> the existing management say that it is impossible - it always is
> possible. This is how to do it without wiping out millions of Americans.
>
> 2. If you say that the dollar goes to zero, then our debts go to
> zero. You can't have it both ways.
> 3. There is no evidence to say that hyperinflation is inevitable.
>
> 4. Basically agree with you, so lets do it.
> 5. As I say, I really do see debt as a huge problem - but believe
> that it can be solved by the approach in "1". The world will not
> cut off our credit if we have a sensible debt management plan. This
> will give us the space to get debt service costs under control and
> gradually reducing as a % of gdp.

Aug 18 02:23 PM

[mna:]

errr, quoted the wrong commentary. This is what I meant to quote.

On Aug 17 07:02 AM chap08 wrote:


> This is the way forward:
>
> 1. Long term cuts in government expenditure. Cuts are a necessary
> part of any plan. As a nation, we have lived beyond our means and
> must accept a lower standard of living for a while. However, that
> doesn't mean that we should make drastic cuts now - that would be
> a mistake. Pro-cyclical deficits during the boom years were a suicidal
> error - hopefully everyone understands that now. That doesn't mean
> that deficits are always wrong. Counter-cyclical deficits are inevitable
> and necessary. We need them now, but only as part of a long term
> plan for debt reduction.
>
> 2. Devalue the dollar. This will help our trade deficit, our deflation
> problem and our debts. Will we be worth less against the rest of
> the world? Yes, and rightly so.
>
> 3. Encourage moderate inflation. This is necessary for a number of
> reasons, e.g. having control over real interest rates. It will also
> help us to gradually erode our debt burden. Defaulting on our national
> debt would be massively deflationary and throw the world in to chaos.
> It is a non starter. The Fed may need further extraordinary action
> to achieve inflation, but it can and will be done.
>
> 4. Regulate the banks. Banks occupy a unique position in a capitalist
> economy. They can not just be left to the free market. History has
> shown us that before, and now it has shown us that again.
>
> 5. Let the free market do most of the rest. I think that you under
> estimate America's capacity for regeneration. Elsewhere on SA people
> are saying how easy it will be for China to rebalance towards a consumer
> society. Well, if that's so easy, how come its so hard for us to
> rebalance towards a productive one? The reality is that neither is
> straight forward, but both can be done. Let the entrepreneurial spirit
> free and things will work out a lot better than you think.

Aug 18 02:27 PM