Our Choice Now: Cut Expenses or Go Down the Road to Financial Oblivion.

Abstract: Our leaders, world wide, have decided that spending and printing money will provide us with a way out of our current financial problems. Our federal government and some of our biggest states are now functionally broke and face default on loans or are dependent upon bailout monies from the federal government. They politicians have the votes form more than 50% of the people so they can comfortably proceed with this measure. The elementary economics of this adventure are well known in the literature and such spending always leads to massive debt and eventually inflation 0r hyperinflation. We cannot back away from this choice to spend our way out of a financial crisis. We let the low class vote and now we pay the consequences.  The experts do not signal a decent recovery. They talk about V, U, L and other economic shapes. But, some experts give us a slim change as they think this current ‘policy’ has not been sufficiently tried out in practice.  Why don’t we roll the dice with our futures and if we all lose the lower class will be about the same level as before. That will satisfy some in the political arena.

 Most societies face difficult choices and many choose the worst one and suffer. We can relate to Germany’s efforts to devalue the mark, Britain’s Dock strike in the 50s, two world wars, our invention against Communist aggression in the 50s, ICBM production and other items. These were all very expensive.

You can generally divide choices into two categories: those that might or probably would work out in the end and those that have little chance of success. We generally look to history or the ‘experts’ for advice on which path to take, if any. Frequently, doing nothing seems to be very viable alternative.

When the choices are offered to the voting public, politics tends to push various groups into several camps—mostly pro, con and the undecided. There are many reasons behind how and why the individual choosing a particular camp and most of the time the reasons have little to do with making such decisions. Thus, those in labor unions who tend to vote Democrat tend to ‘trust’ their leaders and these people then ‘trust’ the elected officials to decide how to vote and/or what programs to support. This is frequently a very good process as it allows some thin majority to institute some program for a while and the system tests the decisions in terms of success and feasibility and if mistakes were made then such programs can be reversed. The foray into Iraq was probably a mistake given the cost and the political polarization of most of the world. We could pull out and just leave Iraq in a heap, probably as we found it, or we could continue to service the notion that we can help Iraq help itself. We did reverse the federal control on welfare and this resulted in significant reductions in the number of those on the dole. We made very good choices in the national highway system as all seemed to have benefited from this project. Much of the work of the EPA was necessary and the results rewarding. We can reverse and ponder changes to many of our established programs if we get a consensus. Debt is not one of these decisions we can reverse.

We are at the most dangerous possible political point: the fulcrum. We are on the knife’s edge. We are balanced nearly 50:50 on every issue. We know that money drives most of the voting process in that we have those who have made their wealth and those who have not. Here is an analysis from a previous blog of mine in the summer of 2008 as we started down the dangerous path toward deflation and its horrors.

Taxation on the Knife’s Edge: The Lower Half Will Always Vote for Higher Taxes.

In political theory there is a theoretical concept whereby your vote has some intrinsic value in any given election.[1] This value depends on the relative sizes and number of political parties in the fray. As such, if you vote in a system that allows only one party, your vote is meaningless. When the number of parties increases your vote may increase in value but only when parties approach an equal size. Frequently, splinter parties may jockey for favors and position and minor concessions and join in with one of two near-equal parties and become king makers.[2]

The value of your vote is shown in the following table:

[3] On the Value[less] of Your Vote

http://rycksrationalizations.blogtownhall.com/2008/01/12/on_the_value[lessness]_of_your_vote.thtml

We are at the 50%/50% level now with little chance of a splinter party entering the scene as they did in 2000 and defeating Al Gore. The vote was very close in 2008 and the outcome was influenced by President Bush’s grievous errors in spending and the war in Iraq and the economy, owned by Bush by political convention. Congress seemed to have escaped any serious condemnation for massive spending projects that led to a 400 bln dollar deficit.

 We can lay all that aside and probe a little deeper into the difficulty of massive debt and the recovery thereof and who benefits and who loses from such debt.

 Who loses?

 This is a serious question as we have the ‘rich’ and the ‘poor’ mixed into our societies across some 3000 miles of land and 1500 miles deep.  We could submit the notion that jobs are provided by the ‘rich’ and that they must survive serious deflation[4][5] and potential inflation so as to keep creating new jobs.

 Next, we ask the ‘poor’ or marginalized the same question and the salient reply is: the rich have all the resources and benefits so we are going to lose anyway so give us some money even it puts us in massive debt and our economy crashes. What is our alternative? This is also good reasoning.

 What does the government do? The government so far just taxes and attempts to level the opportunities and ‘redistribute the wealth’ or “spread something around” as Obama tells us.  This is reasonable as many people cannot participate in our economy for various reasons, including but not limited to ignorance, sloth, crime, drug addiction and cognitive incontinence.

Our government has now chosen to fight this deflationary spiral with massive spending and hence massive debt. This is called monetizing the debt[6] and it has never been successful in curing any financial problems.  The process always leads to inflation or hyper inflation if the inflation rate exceeds 50% per month.

 If the poor depend upon social program and housing assistance and welfare paid by others then we can suggest that those who provide the jobs be given preference when constructing measures to fight deflation. The government does not share this vision.

 Advice from the experts:

 From a noted English financial analyst on the notion of a tipping point:

“Today we call this [the point where you cannot return ed]  "Gladwell's tipping point". Once it goes, you can't get back up. This is why the Federal Reserve has resorted to emergency measures that seem mad at first sight.”[7]--Federal Reserve is damned either way as it battles debt and deflation By Ambrose Evans-Pritchard Last Updated: 6:34PM GMT 18 Dec 2008 [Emphasis is mine in all quotes.]

 Another view from London:

 “The optimists hope for a V-shaped recovery, with economic growth plunging deep into negative territory before bouncing healthily back, and then it's full steam ahead. There's the U-shaped recovery, which involves a more gradual decline in growth, followed by a gradual improvement in the following years. The realists usually anticipate a W-shape, where the economy appears to bounce back briefly, with this followed by a further slide into recession and misery before the true recovery eventually arrives. The real pessimists are more likely to predict an L-shaped recovery - although recovery is the wrong word, since as the shape of the letter implies this means that once the economy hits rock bottom it stagnates for many years before.”[8]-- Gearing up for a V8 recovery? Posted By: Edmund Conway at Apr 7, 2009 [Emphasis is  in the original text in this  quote.]

“To summarise: the world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30.”

“The good news, of course, is that the policy response is very different. The question now is whether that policy response will work. For the answer, stay tuned for our next column.

”[9]-- A Tale of Two Depressions Barry Eichengreen   Kevin H. O’Rourke  Apr 5, 2009 [Emphasis is mine in this quotes.]

Check out the charts below from this link:

 Figure 1. World Industrial Output, Now vs Then

http://www.voxeu.org/files/image/depression_fig1.gif

Figure 6. Government Budget Surpluses, Now vs Then

http://www.voxeu.org/files/image/depression_fig6.gif

 We can translate this as meaning nobody knows if this will work. We wonder if we have chosen the proper ‘policy’ to circumvent a depression. But, if we do get around this crevasse, the question arises: what do we do about the debt? Inflate it into space? Ignore it? Chart 6 shows us that spending to way too high and this must have come from debt.

 If this is true then we are making a big mistake. We cannot return from debt without paying it off or barrowing or some other unknown option. California, a place where many believe there are novel and progressive solutions to many problems has decided to spend[10] them into massive debt with a 40% deficit to revenue ratio and then beg alms from the federal government.[11] Should we spend our way out of a depression as Paul Krugman of the New York Times suggests?[12] What happens to solvent states if CA goes bankrupt? Does the federal government now tax those states with a fiscally responsible balance sheet and give the money to California?

The ugly facts are that California, New York, New Jersey and the federal government are all now deep into the spending and debt business and this comes after we thought that they could perform in some reasonable fashion that might protect both the rich and poor. Other countries that are suffering this malady will probably soon start up competitive currency devaluations and institute tariffs to protect their local economies.[13] Should we do this too? There are now creditor and debtor nations [China is the biggest creditor and the US is the biggest debtor]. What does China and Japan do now? Forgive us our debt?

 What happens when our debt service is say 20% of our GDP? Or 50%?? Do we default on our debts as China fears or do we let inflation roar and devalue our currency so as to liquidate the debt? Do we monetize the debt by printing just enough to make payments on the interest?

 The ugly conclusion here is that millions of people [Lo Popolo or hoi polloi] who were supposedly educated in good universities and were elected to office with grand speeches have decided to ‘solve’ our problems with massive spending both here and abroad. [14] We now have millions of legislators and bureaucrats with this interesting view.  We are committed to spending and later managing the debt and cannot back away from this decision like we did in View Nam.

 From a previous blog on the size of the debt we face:

 This means that if we add our 12.7 trillion National Debt to this 7.36 trillion and then add Obama’s 5-10 trillion dollar spending dreams over the next 4-8 years we can see the sum growing to around 25 trillion, TWICE our GDP.  If we look at the bank money multiplier[15] [16] of about 10 this could balloon our money supply M2 from 8 trillion to 258 trillion. That is 3225.00%. We are all going to be rich like Zimbabwe.  At a mere 3% interest rate, what is the debt service on 25 trillion??  Why, that is 750 bln.  At 10%, not enough to fight massive inflation, the debt service soars to 2.5 trillion! At an interest rate of 20%, which might not be enough we arrive at the nifty sum of 5 trillion dollars every year, nearly double the 2008 federal budget. What is left?[17]

 That is what they have decided to do[18] and now they have the votes.  The lower half will always vote money to themselves. What option do they have? The rich will always vote the opportunity to make more profits. The prediction that such a decision will ultimately make the poor poorer is not a consideration when politicians have the majority vote from the poor.

 We are sailing off into unknown waters with no compass, water or charts.

 rycK

 Comments to: ryckki@gmail.com