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Oil Limits and the Economy: One Story, Not Two

Another great article by Gail Tverberg:

Our Finite World

The two big stories of our day are

(1) Our economic problems: The inability of economies to grow as rapidly as they would like, add as many jobs as they would like, and raise the standards of living of citizens as much as they would like. Associated with this slow economic growth is a continued need for ultra-low interest rates to keep economies of the developed world from slipping back into recession.

(2) Our oil related-problems: One part of the story relates to too little, so-called “peak oil,” and the need for substitutes for oil. Another part of the story relates to too much carbon released by burning fossil fuels, including oil, leading to climate change.

While the press treats these issues as separate stories, they are in fact very closely connected, related to the fact that we are reaching limits in many different directions simultaneously. The economy is the…

View original post 2,182 more words

This Is The Reality Of It: “We Are Factually In A Recession. Period.”

This Is The Reality Of It: “We Are Factually In A Recession. Period.”.

Mac Slavo
March 13th, 2014
SHTFplan.com

Comments (197)
Read by 10,473 people

We can cite scores of statistics and financials that prove without a shadow of a doubt that the U.S. economy is in a tail spin and won’t be recovering any time soon. Abysmal home sales, continued degradation in the national employment numbers, sky rocketing national debt, and ever rising consumer prices all point to serious problems.

But one number in particular pretty much sums it all up. It depicts not just the worsening state of our economy, but puts the lies and machinations of the U.S. government on full display for the world to see.

You’ll often hear the media cite the U.S. Growth Domestic Product (GDP) as a measure of economic growth. It measures the rate at which our economy grows.

In 2013, for example, our GDP was $17.08 trillion, up from the previous year’s $16.42 trillion. So, all of the goods and services sold throughout the United States (essentially, all of the money spent by Americans) rose about $661 billion dollars year-over-year.

Most people might look at the number, see 4% growth, and say it’s a no-brainer. How can the economy not be growing if the GDP rose?

The answer is simple. And when you look at it from the perspective Karl Denninger of the Market Ticker outlines below, you can’t help but realize that you’ve been purposely duped into believing that things are getting better. Just the opposite is true.

When looking at GDP you absolutely must account for the manufactured credit infused into the system during this same time period. When you do you’ll see just why the economy is not growing in any way, shape or form.

It is, in fact, contracting.

However, The Federal Reserve added $1.112 trillion in credit (unbacked by anything) during the same period of time; that’s a debasement of the units in which GDP is reported of 6.51%.

So the real change in the economy is in fact negative 2.51%.

We are factually in a recession.

Period.

There can be no progress economically or politically until the lies are stopped.  These are not mistakes; both the hosts and guest are fully-aware of The Fed’s balance sheet.

That extra trillion dollars slammed into the system by The Fed pretty much wipes out any growth noted by the Federal government’s statistics, because we never actually earned that money. It’s debt. Not growth!

Incidentally, the other oft cited measure of economic health is the Dow Jones Industrial Average, which currently sits around record all-time highs of 16,000 points, is likewise benefiting from this illusion. Guess where that stock market “growth” came from? Yes, the very same credit being used to prop up the economy (that $85 billion or so in Fed Treasury purchases every month) is also keeping stocks at record highs.

Back on Main Street, where most Americans live, we’re feeling the effects. Do we need to mention that the Patient Affordable Care Act has just forced working Americans to spend up to quadruple on their monthly premiums? Or that millions of Americans who are unemployed and no longer counted in the official statistics have absolutely no income whatsoever because their unemployment insurance has run out? Or that the price of everything from food and energy to rent and clothing is rising?

That kind of thing tends to happen when you debase your currency.

Last week famed contrarian economist John Williams noted that the economy gave apowerful recessionary signal in January that had not been seen since right before the market crash in 2007. Furthermore, one of the leading economic indicators of a recessionary environment is the price of copper because it is so closely associated with global growth. It has dropped significantly in recent months and it could well besignaling a coming crash in stocks just as it did in 2008.

When, not if, this thing buckles again we’re going to be in for an unprecedented period in U.S. history.

The system was on the brink of total collapse in 2008, as evidenced by Representative Brad Sherman on the House floor:

Many of us were told in private conversations that if we voted against this bill on Monday, that the sky would fall, the market would drop two or three thousands points the first day, another couple thousand the second day, and a few members were even told that there would be martial law in America if we voted no.

House Representative Brad Sherman (D-California)
Debate on the House Floor, October 2, 2008

They’ve used up all of the tricks in their magic hat. One misstep here and we’re going down. Any number of domestic or geo-political events could trigger a meltdown in U.S. stock markets and send the broader economy crashing.

This Is The Reality Of It: "We Are Factually In A Recession. Period."

This Is The Reality Of It: “We Are Factually In A Recession. Period.”.

Mac Slavo
March 13th, 2014
SHTFplan.com

Comments (197)
Read by 10,473 people

We can cite scores of statistics and financials that prove without a shadow of a doubt that the U.S. economy is in a tail spin and won’t be recovering any time soon. Abysmal home sales, continued degradation in the national employment numbers, sky rocketing national debt, and ever rising consumer prices all point to serious problems.

But one number in particular pretty much sums it all up. It depicts not just the worsening state of our economy, but puts the lies and machinations of the U.S. government on full display for the world to see.

You’ll often hear the media cite the U.S. Growth Domestic Product (GDP) as a measure of economic growth. It measures the rate at which our economy grows.

In 2013, for example, our GDP was $17.08 trillion, up from the previous year’s $16.42 trillion. So, all of the goods and services sold throughout the United States (essentially, all of the money spent by Americans) rose about $661 billion dollars year-over-year.

Most people might look at the number, see 4% growth, and say it’s a no-brainer. How can the economy not be growing if the GDP rose?

The answer is simple. And when you look at it from the perspective Karl Denninger of the Market Ticker outlines below, you can’t help but realize that you’ve been purposely duped into believing that things are getting better. Just the opposite is true.

When looking at GDP you absolutely must account for the manufactured credit infused into the system during this same time period. When you do you’ll see just why the economy is not growing in any way, shape or form.

It is, in fact, contracting.

However, The Federal Reserve added $1.112 trillion in credit (unbacked by anything) during the same period of time; that’s a debasement of the units in which GDP is reported of 6.51%.

So the real change in the economy is in fact negative 2.51%.

We are factually in a recession.

Period.

There can be no progress economically or politically until the lies are stopped.  These are not mistakes; both the hosts and guest are fully-aware of The Fed’s balance sheet.

That extra trillion dollars slammed into the system by The Fed pretty much wipes out any growth noted by the Federal government’s statistics, because we never actually earned that money. It’s debt. Not growth!

Incidentally, the other oft cited measure of economic health is the Dow Jones Industrial Average, which currently sits around record all-time highs of 16,000 points, is likewise benefiting from this illusion. Guess where that stock market “growth” came from? Yes, the very same credit being used to prop up the economy (that $85 billion or so in Fed Treasury purchases every month) is also keeping stocks at record highs.

Back on Main Street, where most Americans live, we’re feeling the effects. Do we need to mention that the Patient Affordable Care Act has just forced working Americans to spend up to quadruple on their monthly premiums? Or that millions of Americans who are unemployed and no longer counted in the official statistics have absolutely no income whatsoever because their unemployment insurance has run out? Or that the price of everything from food and energy to rent and clothing is rising?

That kind of thing tends to happen when you debase your currency.

Last week famed contrarian economist John Williams noted that the economy gave apowerful recessionary signal in January that had not been seen since right before the market crash in 2007. Furthermore, one of the leading economic indicators of a recessionary environment is the price of copper because it is so closely associated with global growth. It has dropped significantly in recent months and it could well besignaling a coming crash in stocks just as it did in 2008.

When, not if, this thing buckles again we’re going to be in for an unprecedented period in U.S. history.

The system was on the brink of total collapse in 2008, as evidenced by Representative Brad Sherman on the House floor:

Many of us were told in private conversations that if we voted against this bill on Monday, that the sky would fall, the market would drop two or three thousands points the first day, another couple thousand the second day, and a few members were even told that there would be martial law in America if we voted no.

House Representative Brad Sherman (D-California)
Debate on the House Floor, October 2, 2008

They’ve used up all of the tricks in their magic hat. One misstep here and we’re going down. Any number of domestic or geo-political events could trigger a meltdown in U.S. stock markets and send the broader economy crashing.

The Animal Spirits Page: How monetary policy drives foreign policy

The Animal Spirits Page: How monetary policy drives foreign policy.

It should now be evident that America’s foreign policy is to an extent being driven by our banking mess. Again and again, we see Washington, including Wall Street’s handmaiden, the Fed, exporting monetary chaos implicitely in order to weaken the status of potentially competing reserve currencies:

  • Wall Street sent a tsunami of bad AAA-rated mortgage debt to Europe, much to Germany, the locus of power for the Euro (and again, implicit admission of guilt is seen in the apparent fronting of billions of bailout dollars to the European banks by the Fed after the crisis);
  • Washington has apparently fomented or supported a coup in the Ukraine that increases the likelihood of war in Europe dramatically therefore sending the gigantic pools of liquid financial assets in the world scurrying into the greenback and US Treasuries, which the Chinese have stopped gobbling up;
  • the other factor is that the military-industrial complex needs war to get its funding, and when drone-bombing rag-heads can’t provoke a serious attack, destabilizing a former Eastern bloc nation and provoking a somewhat justifiably paranoid Russian leader into military action guarantees at least a shot in the arm of crisis funding.

Russia has repeatedly stated over the past decades that an EU move on the Ukraine crosses a red line. The EU ignored the warning, and with the US’s help and the ire of Ukrainians sick of a corrupt government crossed Putin’s red line. What the Ukrainians want is democracy and relief from their corrupt plutocrats (see previous post’s article by Paul Craig Roberts).

The US has no compelling strategic interest in the Ukraine, or in the Crimea remaining part of the Ukraine. Yes, the Ukraine has been looted by its oligarchs, just as Russia was, and just as the US is being looted by its oligarchs right now; incomes of a majority of American households are falling so the banks can collect on bad debts. It would be nice for people everywhere if they could break the grip of the plutocrats over their livelihoods. In the Ukraine, to substitute debt servitude to Western banks for the domination of the oligarchs would only accelerate the collapse of the EU. And it’s not clear the EU, if it offers help, won’t be ripped off by the oligarchs as well. The new government in the Ukraine has already increased the power of the oligarchs by giving them provinces to rule, so it’s not clear the Western “rescuers” are even able to help solve the fundamental problem at all, and might end up losing their shirts again, as they have in Greece, Portugal, et al.

Until democratic governments around the world become strong enough to counteract the power of the plutocratsby taxing them, both their income and their wealth (as Sweden does) the revolving looting of sovereign governments and demolition of middle classes by the plutocrats and their corporations will continue.

A couple of posts ago I said the scariest thing I’ve heard recently was Catherine Anne Fitts saying what the world needs now is a global debt for equity swap. I should say I generally like Ms. Fitts’ analysis and suspect she may even have misspoken when she made this comment. Such a move would concentrate ownership of the world’s assets sufficiently to create even more of a Plantation Earth than we have currently.

She identified the problem, but not the solution. What the world needs now is a global jubilee, debt forgiveness. The debt that the Fed is shoving under the carpet via QE is what is known in banking circles as “bad debt.” It is loans that never should have been made because they will never be repaid. In honest not crony capitalism such debts come out of the profits (as losses) of the banks that made them. In crony capitalism, with a central bank controlled by the banks, such debts are “paid back” by being monetized and put on the backs of the taxpayers either directly or through inflation.

The austerity programs Europe has put in place so that Wall Street and European banks can be paid back bad debts have destroyed more than one economy and more are probably yet to fall. (The idea promoted ten plus years ago of “convergence” of interest rates in the EU between periphery and core caused me to gag at the time.) Debt slavery to Western banks is not the answer. (China is apparently making similar mistakes; it will be interesting to see what they do with the bad debt. I suspect their strong central government will tell the bankers to go stuff it.) Ms. Fitts suggests that sooner or later the plutocrats will destroy the banks in order to buy them cheap and collect the rents themselves, canny suggestion indeed.

Chaos in the world = a strong dollar. Until it doesn’t. Chaos has a way of being unpredictable.

Capitalism has killed democracy. “Free” markets dominated by monopolies and oligopolies are not what Adam Smith had in mind. It’s time for democracy to be reborn. There are degrees of economic inequality that are simply immoral and destructive and humankind has the right to reject them. When the top 85 families own as much as the bottom 3.5 billion people, as recently reported, we have reached such a point.

The Top 12 Signs That The U.S. Economy Is Heading Toward Another Recession

The Top 12 Signs That The U.S. Economy Is Heading Toward Another Recession.

 By Michael Snyder, on March 5th, 2014 

12 Signs

Is the U.S. economy steamrolling toward another recession?  Will 2014 turn out to be a major “turning point” when we look back on it?  Before we get to the evidence, it is important to note that there are many economists that believe that the United States never actually got out of the last recession.  For example, data compiled by John Williams of shadowstats.comshow that the U.S. economy has continually been in recession since 2005.  So if anyone out there would like to argue that America is experiencing a recession right now, I certainly would not have a problem with that.  In fact, that would fit with the daily reality of tens of millions of Americans that are deeply suffering in this harsh economic environment.  But no matter whether we are in a “recession” at the moment or not, there are an increasing number of indications that we are rapidly plunging into another major economic slowdown.  The following are the top 12 signs that the U.S. economy is heading toward another recession…

#1 We recently learned that the number of new mortgage applications in the United States had fallen to the lowest level that we have seen in nearly 20 years.

#2 Radio Shack has announced that it is going to close more than 1,000 stores.  This is just another sign that we are in the midst of a “retail apocalypse“.

#3 The ISM Services index just fell to its lowest level in 4 years, and ISM Services Employment just experienced its largest decline since the collapse of Lehman Brothers.

#4 Obamacare is really starting to hammer the U.S. health care industry

“The Affordable Care Act is creating significant financial uncertainty to health care organizations,” said a survey respondent from the health care and social assistance industry.

“With little warning, the negative impact on revenuehas been unprecedented.”

#5 Trading revenue at the “too big to fail” banks on Wall Street is way down

Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM) are bracing investors for a fourth straight drop in first-quarter trading, a period of the year when the largest investment banks typically earn the most from that business.

Citigroup finance chief John Gerspach said yesterday his firm expects trading revenue to drop by a “high mid-teens” percentage, less than a week after JPMorgan Chief Executive Officer Jamie Dimon said revenue from equities and fixed income was down about 15 percent. If trading at the nine largest firms slumps that much, it would extend the slide from 2010’s first quarter to 36 percent.

#6 One of the “too big to fail” banks, JPMorgan, is planning to fire “thousands” more workers.

#7 Moody’s has downgraded the credit rating of the city of Chicago again.  Now it is just three notches above junk status.

#8 The U.S. economy actually lost 2.87 million jobs during the month of January according to the unadjusted numbers.  Over the past decade, the only time the U.S. economy has lost more jobs during the month of January was in 2009 at the peak of the last recession.

#9 In January, real disposable income in the U.S. experienced the largest year over year decline that we have seen since 1974.

#10 Only 35 percent of all Americans say that they are better off financially than they were a year ago.

#11 Global retail sales for machinery giant Caterpillar have fallen for 14 months in a row.

#12 The economic data show that virtually all of the largest economies on the planet are slowing down right now.  The following is from a recent Zero Hedge article

The last 3 weeks have seen the macro fundamentals of the G-10 major economies collapse at the fastest pace in almost 4 years and almost the biggest slump since Lehman. Despite a plethora of data showing that ‘weather’ is not to blame, US strategists, ‘economists’, and asset-gatherers are sticking to the meme that this is all because of the cold on the east coast of the US (and that means wondrous pent-up demand to come). However, as the New York Times reports, for the earth, it was the 4th warmest January on record.

For much more on how the rest of the global economy is also slowing down, please see my recent article entitled “20 Signs That The Global Economic Crisis Is Starting To Catch Fire“.

Meanwhile, things in Ukraine continue to become even more tense, and the Russian government continues to debate how it will respond if the U.S. does end up deciding to hit Russia with economic sanctions.

According to one Russian news source, the Russian parliament is actually considering the confiscation of the property and assets of U.S. businesses in Russia if the U.S. decides to go ahead with economic sanctions against Russia…

The upper house of Russia’s parliament is mulling measures allowing property and assets of European and US companies to be confiscated in the event of sanctions being adopted against Russia over its threatened military intervention in Ukraine.

We are talking about banks, retail chains, mining operations, etc.

U.S. companies have billions invested in Russia, and all of that could be gone in an instant.

So let us certainly hope that economic war between the United States and Russia is averted.  Our economy is hurting enough as it is.

But no matter how things with this crisis in Ukraine play out, it looks like hard times are ahead for the U.S. economy.

Unfortunately, most Americans never learned the lessons that they should have learned back in 2008.

They just assume that the federal government and the Federal Reserve have fixed our problems and have everything under control, so they are not preparing for the next great crisis.

In the end, tens of millions of Americans will be absolutely devastated when they get absolutely blindsided by what is coming.

Time Is Running Out

Welcome to the Currency War, Part 12: Bankrupt Rome and Soaring Euro-Bonds

Welcome to the Currency War, Part 12: Bankrupt Rome and Soaring Euro-Bonds.

by John Rubino on February 28, 2014 · 14 comments

Only in a world totally corrupted by easy money could the following two things be announced on the same day. First:

 

European Bonds Surge as ECB Stimulus Confines Crisis to Memory

Yields on the euro area’s government bonds have never been lower as the potential for extended European Central Bank stimulus helps exorcise memories of the region’s sovereign debt crisis. 

The bond-market rally is broad based, encompassing both core economies such asFrance and also peripheral markets including Greece, which was pushed to the brink of exiting the currency bloc during the region’s financial woes. Another of those nations, Portugal, took a step toward exiting an international bailout program today as it bought back bonds, while Italy, supported in the turmoil by ECB bond purchases, sold five-year notes at a record-low rate.

“Investors are starting to look at the non-core European bond markets as a viable investment alternative again,” said Jussi Hiljanen, head of fixed-income research at SEB AB inStockholm. “Further ECB actions have the potential to maintain the tightening bias on those spreads,” he said, referring to the yield gap between core nations and the periphery.

The average yield to maturity on euro-area bonds fell to a record 1.6343 percent yesterday, according to Bank of America Merrill Lynch indexes. It peaked at more than 6 percent in 2011, the data show.

Italy’s 10-year yield fell seven basis points to 3.47 percent after touching 3.46 percent, a level not seen since January 2006. Portugal’s 10-year yield dropped four basis points to 4.81 percent and touched 4.78 percent, the least since June 2010, while Ireland’s two-year note yield and Spain’s five-year rates dropped to records.

Then, at about the same time:

 

Rome days away from bankruptcy

Eternal city warns it will go bust for the first time since it was destroyed by Nero 

Matteo Renzi, the Italian prime minister, came under pressure on Thursday as the city of Rome was on the brink of bankruptcy after parliament threw out a bill that would have injected fresh funding.

Ignazio Marino, Rome mayor, said city services like public transport would come to a halt and that he would not be a “Nero” – the Roman emperor who, legend has it, strummed his lyre as the city burnt to the ground.

Marino said that Renzi, a centre-left leader and former mayor of Florence who was only confirmed by parliament this week, had promised to adopt urgent measures to help the Italian capital at a cabinet meeting on Friday.

The newly-elected mayor faces a budget deficit of 816 million euros ($1.1 billion) and the city could be placed under administration if he does not manage to close the gap with measures such as cutting public services.

“Rome has wasted money for decades. I don’t want to spend another euro that is not budgeted,” Marino said, following criticism from the Northern League opposition party which helped shoot down the bill for Rome in parliament.

The draft law would have included funding for Rome from the central government budget as a compensation for the extra costs it faces because of its role as the capital including tourism traffic and national demonstrations.

Other cash-strapped cities complained it was unfair. But Marino warned there could be dire consequences. “We’re not going to block the city but the city will come to a standstill. It will block itself if I do not have the tools for making budget decisions and right now I cannot allocate any money,” he told the SkyTG24 news channel.

Marino said that buses may have to stop running as soon as Sunday because he only had 10 percent of the money required to pay for fuel in March.

He added: “With the money that we have in the budget right now, I can do repairs on each road in Rome every 52 years. That’s not really maintenance.”

How is it that Italy is able to borrow money at low and falling rates – which indicates that borrowers are confident of its ability to pay its bills – while its major city, far more important to that country than New York or Los Angeles is to the US, slides into bankruptcy?

The answer is that Rome is irrelevant in comparison with two other facts. First, Europe is slipping into deflation, which generally leads to lower bond yields. Second, the European Central Bank is virtually guaranteed to respond to fact number one with quantitative easing on a vast scale.

So the bond markets, far from rallying on the expectation of a eurozone recovery, are rising in anticipation of the opposite: a new round of recession/deflation/instability that forces the abandonment of even the pretense of austerity and the adoption of aggressively easy money.

In this scenario, a Roman bankruptcy is actually a good thing because it pushes the ECB, Bundesbank, Bank of Italy and the other relevant monetary entities to stop dithering and start monetizing debt in earnest. Once it gets going, the goal of the program will be to refinance everyone’s debt at extremely low rates, push down the euro’s exchange rate versus the dollar, yen and yuan, and shift the currency war front from Europe to the rest of the world. The race to the bottom continues.

The rest of this series is available here.

Say’s Law and the Permanent Recession – Robert Blumen – Mises Daily

Say’s Law and the Permanent Recession – Robert Blumen – Mises Daily.

Mises Daily: Friday, February 28, 2014 by 

Mainstream media discussion of the macro economic picture goes something like this: “When there is a recession, the Fed should stimulate. We know from history the recovery comes about 12-18 months after stimulus. We stimulated, we printed a lot of money, we waited 18 months. So the economyipso facto has recovered. Or it’s just about to recover, any time now.”

But to quote the comedian Richard Pryor, “Who ya gonna believe? Me or your lying eyes?” A Martian economist arriving on earth would have to admit the following: the US economy has experienced zero real growth since 2000. This is what I call the permanent recession. Permanent, because, unlike past downturns — there will be no recovery. To make the case for this view, I will rely on the ideas of several classical and Austrian economists: J.B. Say, James Mill, Mises, Rothbard, W.H. Hutt and Robert Higgs.

I will begin with the J.B. Say, who is known for the eponymous Say’s Law. To explain I will quote from Say’s Treatise on Political Economy:

[A] product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value. … Thus the mere circumstance of creation of one product immediately opens a vent for other products.

Say’s Law can be explained in the following terms:

1. The way that a buyer demands a good is by supplying a different good.

2. The supply of one type of good constitutes the demand for other, different goods.

3. The source of demand is production, not money. Money is only a temporary parking place for past production.

In the modern economy with division of labor, most of us demand goods when we supply our labor. I work as a software engineer. I supply my labor writing computer software. And from that supply I am able to demand other goods, such as coffee.

Say’s ideas were used to settle a debate between the British economists David Ricardo and Thomas Malthus who believed recessions were caused by a general glut. The concept of a glut for a single good is easy enough to understand: there is more supply on the market than demand at the offered price. A glut can be alleviated by a fall in the price of that good. The producers of the good may take a loss if the market price is below their costs, but the market can always clear at some price.

The idea of a general glut is that all markets for all goods are in surplus. And for some reason, prices are unable to fix the problem. Ricardo opposed Malthus, arguing that the concept of general glut violates sound economics and clear thinking. He argued this point using Say’s Law: because demand is constituted by supply, aggregate demand, meaning the demand for all goods on the market, consists exactly of all things supplied. Aggregate demand is not only equal to, but identical to, aggregate supply. The two can never be out of balance. And if a general glut is a logical impossibility, then it cannot be the cause of a recession.

The idea of aggregate supply and demand in getting out of balance has appeared many times in the history of economic thought. The same idea is either called overproduction or underconsumption, depending on whether the problem is too many goods or not enough purchasing power. Keynesian economics is a form of underconsumption theory. The overproduction/underconsumption theory has been debunked by sound economists, but like a zombie, it refuses to die.

It is acknowledged by both sides that, if Say’s Law is true, then Keynes’s entire system is wrong. Keynes knew this, so he took upon himself the task of refuting Say’s Law as the very first thing in his General Theory. Keynes’s argument was that Say’s Law is only valid under the conditions of full employment, but that it does not hold when there are unemployed resources; in that case we are in the Keynesian Zone where the laws of economics are turned upside down.

But, as Stephen Kates explains in his book Say’s Law and the Keynesian Revolution (subtitled How Economics Lost its Way), Keynes failed in his attempt to overturn Say’s Law. Kates shows beyond any dispute that Say and his fellow classical economists were well aware that there could be unemployed resources, and that Say’s Law was still valid in that case.

To summarize, there is no such thing as a general glut or a demand deficiency, we can have idle resources, and Say’s Law is still valid. So how did classical economists explain recessions? Producer error. Producers had produced the wrong mix of goods. James Mill in his essay “Commerce Defended” explains the meaning of producer error:

What indeed is meant by a commodity’s exceeding the market? Is it not that there is a portion of it for which there is nothing that can be had in exchange. But of those other things then the proportion is too small. A part of the means of production which had been applied to the preparation of this superabundant commodity should have been applied to the preparation of those other commodities till the balance between them had been established.

Kates and Gerard Jackson have argued that the classical economist had a theory of producer error much like the one later developed by Mises. Mises developed existing ideas and integrated Austrian capital theory and time preference theory to provide an explanation of why many producer errors occur at the same time. We know this as the Austrian theory of the business cycle.

Mises called the production errors malinvestment. These errors happen systemically because of fractional reserve banks loan money into existence that is not backed by savings. That misleads producers into thinking that there are more real savings available than society wishes to save. Producers then make both the wrong mix of capital goods of different orders, and the wrong proportion of capital goods in relation to consumption goods.

When there is malinvestment there must be a recession, for the following reason: there were never enough real resources to complete all of the capital projects that were started during the boom. The firms that started these projects either over-estimated the demand for their output, or, under-estimated their costs. Somewhere along the way, firms will discover that they cannot obtain all of the factors they need at a price below their costs. They cannot make profits. Many of them fail.

I will give an example of how malinvestment leads to a recession. I worked in San Francisco during the tech bubble. There were many tech startups. Each one assumed that they would be able to grow by hiring more employees at the prevailing wage rates. But the prevailing wages did not reflect the true scarcity of skilled technical people because all of these businesses planned to hire more workers over the same time frame. But the number of skilled engineers could not possibly grow that fast. If you think of a software engineer as a form of human capital, a software engineer has a long period of production and requires many inputs (mostly coffee, but some other things as well).

And there just weren’t enough engineers to build all of these web sites. One firm could have hired more engineers by paying double the prevailing wage, but it wasn’t in the economics of their business to do so. And in any case, most of the compensation was in imputed value of the stock options, which could be any number that you want if you assumed that the bubble will keep blowing up forever.

What this shows is that, while you can fund a new venture with money printing, you cannot print skilled workers or office space. At some point, real factors become the bottleneck, so their price has to rise. And when that happens, some producers get squeezed out because they cannot raise prices. If they over-estimated demand for their output from the start, they would have needed lower, not higher, costs to make profits. And that is the start of the recession.

Mises’s theory explains why the boom starts and why it comes to an end. Production errors cannot continue indefinitely because they result in losses. But why do we have a lasting recession? Why doesn’t everyone find a new job tomorrow? To explain, I will turn to the great English Austrian, W.H. Hutt.

Hutt used Say’s Law to explain the recession. Hutt observed that when one person becomes unemployed, he stops producing — and supplying. And from Say’s Law he loses his power to demand. Also from Say’s Law, his demand constituted the means for others to supply, and for those others to demand, so the prosperity of others is diminished. The malinvestments are the first ledge in the waterfall. Then, other businesses will see the impact, even those that were not originally part of the malinvestment.

Keyes said something like this in his model of the circular flow of spending. Keynes was right that there is an interdependence of all economic activity. But Keynes was wrong about consumption being the driving force of this: it is producing, not consuming. According to Say, the interdependence is constituted by the relationship of all production, not of expenditure. Expenditure of money is only the culmination of the process that began with production:

That each individual is interested in the general prosperity of all, and that the success of one branch of industry promotes that of all the others. In fact, whatever profession or line of business a man may devote himself to, he is the better paid and the more readily finds employment, in proportion as he sees others thriving equally around him.

I will here give another example. When I worked in San Francisco during the tech bubble, I got coffee every day at a café near my office. When the tech bubble burst, this café failed as well. Was that because they made bad coffee? Or because software engineers got tired of drinking coffee? I can assure you that did not happen. It was because customers at the café were part of the bubble. The difference between pets.com and the café is that, had there not been a bubble, the same café would have existed at the same spot, serving coffee to different people working at different jobs producing different things that were demanded by a balanced market, because people who go to work still want their coffee.

Hutt also had an economic explanation of how the economy recovers from a recession. He emphasized that any useful good or service can be integrated into the price system, somewhere, and at some price. Once someone is again producing, he can supply, and then he can demand, and by demanding, he creates a market for the supply of other producers. And so on. But that requires two things: time and flexibility.

It takes time for entrepreneurs to sort through the broken shards of the boom to figure out what is really in demand, and what the supplies of factors are. But the recovery will occur because eventually entrepreneurs see all of those unemployed resources as a bargain. Productive assets and labor won’t stay on sale forever. When prices of some factors get low enough, then the people who held on to some cash will see attractive yields.

Either people will move around, or just take the best job that they can in order to get by until things improve. The empty offices will get leased out. The key is that profit margins must open up. Hutt argued that can happen even in a depression if prices are flexible because there is always some way to combine inputs into outputs at a profit, if prices will cooperate. When confidence is low, entrepreneurs will make more conservative estimates of the market for their outputs, and they may require wider profit margins. You can think of it as a risk premium. And that means that the prices for some types of labor and capital must fall considerably not only from their bubble values, but in relation to other prices.

During the tech bubble, many small companies were formed. Every one of them required a director of engineering, a CEO, a CFO, and several other key management positions. People got hired into these jobs who lacked the experience to get such a job in an established company, or people at established companies were hired away and less experienced people were promoted. This process could be described as job title inflation: high level job titles were debased. When the recession hit, a lot of these positions simply went away, and the people who held them had to seek new jobs. Some of these people rose to the level of their new responsibilities and advanced their career, but others had to take a step back and accept a lower paying job with a less important-sounding title. And if they were unwilling to do so, then that prolonged the duration of their unemployment.

When there is no recovery, or it is long in coming, what got in the way? Hutt had an answer to this: the price system is blocked from working. Hutt emphasized wage rigidities caused by labor unions. Unions are cartels that attempt to create a monopolistic price by legally raising wages above labor’s marginal value product. When the price of something increases we move along the demand curve to a lower quantity demanded. Less quantity means less labor is hired into those jobs, and the displaced workers must find some other work, which is by definition lower paid or otherwise less preferable.

Hutt explained why labor unions decrease aggregate demand rather than increase it. When workers shift from a higher-valued occupation to a lower-valued one, they produce less, and therefore supply less, and by Say’s Law, demand less. And as Hutt showed, by demanding less, they diminish the market for the supply of others.

Anything that prevents wages or asset prices or capital market prices from falling moves markets away from clearing. In the modern world, one of the main barriers to recovery is Keynesian stimulus. Stimulus tries to create more demand without creating more supply. We know from Say’s Law that this is doomed to fail because supply and only supply constitutes the demand for other goods. What stimulus is really trying to do is to inflate the fake price system of the boom so that more expenditures can occur at the fake prices producing more of the wrong things for which there was never a real demand in the first place. And that cannot work because it was the breakdown of production under the fake prices that caused the boom to end. For a real recovery to occur, production must be reorganized along the lines of consumer demand.

Now I am going to turn to the Great Depression and show the relevance of Hutt’s thinking to that time.

Prior to the 1930s, recoveries from a panic, as they were called, took about 12-18 months. The great depression of 1920 (the one that you’ve probably never heard of) lasted about that long. Why? As historian Thomas Woods wrote, “Harding cut the government’s budget nearly in half between 1920 and 1922. The rest of Harding’s approach was equally laissez-faire. Tax rates were slashed for all income groups. The national debt was reduced by one-third.”

The Great Depression also began with a stock market crash followed by a downturn. As the price system began to work, a normal recovery had begun by the early 30s. Then the New Deal kicked in, which created a depression within a depression that lasted until the mid-1940s. Ten years later, what could have kept the US economy underwater for 15 years? The price system was blocked, especially in labor markets.

Herbert Hoover held to a variation of underconsumption theory called the purchasing power theory of wages[1] According to this theory, high wages in themselves created more purchasing power. And by “high” he meant, above market values. Low wages, thought Hoover, were the cause of the depression because labor did not have enough purchasing power to buy back its own output. Hoover exhorted business leaders not to lower wages, and many of them believed him and followed his advice, or did so because they were clear enough that regulation would follow had they not complied. As explained by standard price theory, Hoover’s policies produced unemployment on a massive scale.

Hoover also believed in a strange class warfare doctrine. He thought that by preventing wages from falling, that all of the burden of the adjustment of production could be shifted from labor as a classto capital as a class. In America’s Great DepressionRothbard quotes Hoover as follows:

For the first time in the history of depression, dividends, profits, and the cost of living have been reduced before wages have suffered. … They have maintained until the cost of living had decreased and the profits had practically vanished. They are now the highest real wages in the world.

Following Hoover was FDR, who made things even worse. One of the New Deal agencies, the National Recovery Administration, employed agents to scour the country looking for stores that were lowering their prices. From Jim Powell’s FDR’s Folly: How Roosevelt and his New Deal Prolonged the Great Depression:

There were some 1,400 NRA compliance enforcers at fifty-four state and branch offices. They were empowered to recommend fines up to $500 and imprisonment for up to six months for each violation. On December 11, 1933, for instance, the NRA launched its biggest crackdown summoning about 150 dry cleaners to Washington for alleged discounting.

In addition to problems with prices, there was a deeper problem with the New Deal. For that, I will turn to the contemporary economic historian Robert Higgs.

Higgs has noted that the Great Depression was characterized by a collapse in capital spending. Austrians know that capital accumulation is what increases real wages. And capital consumption means lower real wages. We also know that a large volume of gross capital investment is required to offset capital simply wearing out from use every year. Net capital investment begins only when gross investment more than offsets capital consumption. And there is nothing to ensure that any volume of gross investment at all must occur during any given year. If investors stop investing, then the capital stock shrinks, and real wages, even under conditions of full employment will fall.

The reason for the collapse in investment was, says Higgs, “a pervasive uncertainty among investors about the security of their property rights in their capital and its prospective returns.” Higgs calls this regime uncertainty. This rational fear was based on the ideology of the New Dealers. The New Deal brain trust was full of anti-market ideologues who wanted to restructure the US economy from a free enterprise system to a socialistic-fascistic centrally planned system.

Higgs gives several pieces of evidence in support of the regime uncertainty hypothesis. One, qualitative, was the writings of business leaders in which they explained their reasons for lacking the confidence to invest. Second, opinion polls showing the same thing. And the third was the sharp rise in the term premium of corporate bond yields at maturities beyond one year. While we can only guess at the reasons for this, Higgs points out that it was not the usual yield curve that we are accustomed to in bond markets. Higgs attributes this heightened risk premium to the extreme levels of uncertainty investors had about the future of property rights in equity and debt, which are long time horizon assets.

And now I am at the point that I promised in the title. It is my view that we have been in a recession since 2000, that the economy has not recovered, and will not recover. I will first provide some supporting evidence that the economy is in a recession, and then explain why.

John Williams, an economic statistician and the proprietor of the web site Shadowstats, has produced a version of the real GDP based on the government’s nominal GDP deflated by his own GDP deflator. (The GDP deflator is sort of like the CPI, a price index that is used to convert nominal GDP into real GDP. For some reason they don’t use the same price index for both consumer prices and for this.) Like Williams’s own CPI, his GDP deflator is computed with older rules from before the time when the BLS began cooking the books to hide inflation. Williams’s measure of real GDP shows low to negative growth over the period since 2000.

Another way of measuring the economy is through the capital stock. The US economy requires about a trillion dollars per year of gross investment just to replace capital consumption. Higgs has written that real net private investment for 2012 was at an indexed level of 60 compared to a baseline of 100 for 2007. Corporate America is sitting on huge piles of cash rather than investing it. American non-financial corporations hold more cash than they have for 50 years.

Many measures of labor markets show zero to negative wage growth. While this is to some extent due to problems in labor markets themselves, a shrinking capital stock should show up as lower wages. Look at the labor force participation rate: it is now at the lowest level in decades and is plummeting rapidly. Also check out the trend in median household income. Analyst Jeff Peshut at RealForecasts publishes some similar graphs showing the negative trends in the volume of employment in labor markets.

Anecdotally, the media frequently reports that new college graduates cannot find career path entry level jobs, so they are forced to enter the labor force on a low wage track doing relatively unskilled work.

Another way of looking at the size of the economy is through the rate of time preference. Higher time preference means less saving, less investment, and less capital accumulation. But how do we measure it? Interest rates and yields generally of all kinds of assets, both financial and corporate balance sheets, are a measure of this.

Profit margins reflecting internal yields on US corporate assets have increased in the last few years. According to what Andrew Smithers disparagingly refers to as “stock broker economics,” high rates of profit are good for stocks. The Austrian economist Jesús Huerta de Soto makes an under-appreciated point about profit margins and stock prices.[2] Pervasively high or increasing rates of profit may show that the rate of time preference is increasing, implying that the capital stock is shrinking. If not time preference, then the perception of risk may be increasing, which would have a similar depressing effect on investment.

Given the work of Hutt and Higgs in explaining why a recession persists with no recovery, here is a list of factors causing price inflexibility and regime uncertain in today’s economy:

1) Capital market price floors, like the Greenspan-Bernanke put and QE which prevent the markets for capital goods from clearing.

2) Bailouts of Wall Street, which are another form of price floors, and keep the incompetent management teams in place.

3) The nationalization of the mortgage market, another form of capital market price floors and house price floors, which removes the largest sector of credit markets from the domain of economic calculation.

4) Obamacare. Besides the direct costs for taxpayers, the bill introduces massive incentive changes in labor markets, the implications of which are still not clear.

5) Economist Casey Mulligan documents extensive changes in labor market incentives in his bookThe Redistribution Recession. He argues that these changes have created a huge implicit tax on income for the unemployed contemplating an offer of paid work.

6) The pending default of most pension plans including Social Security, the medical welfare state, US states, counties, and cities. How the default will be paid for is creating great uncertainty.

7) Uncertainty created by the threat of wealth taxation and bail-ins, as outlined in an IMF paper.

8) The surveillance of all financial transactions and expanded reporting requirements for the assets of wealthy investors

As Hayek said, the more the state centrally plans, the more difficult it becomes for the individual to plan. Economic growth is not something that just happens. It requires saving. It requires investment and capital accumulation. And it requires the real market process. It is not a delicate flower but it requires some degree of legal stability and property rights. And when you get in the way of these things, the capital accumulation stops and the economy stagnates.

Note: The views expressed in Daily Articles on Mises.org are not necessarily those of the Mises Institute.

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Robert Blumen is an independent enterprise software consultant based in San Francisco. Send him mail. See Robert Blumen’s article archives.

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Rome Is On The Verge Of Detroit-Style Bankruptcy | Zero Hedge

Rome Is On The Verge Of Detroit-Style Bankruptcy | Zero Hedge.

With European peripheral bond yields collapsing every single day to new all time lows (primarily driven by Europe’s near-certainty that a US-style QE is imminent as we first showed here in November, despite Mario Draghi’s own words from November 2011 that a QE intervention is virtually impossible), increasingly more of Europe is trading just as safe, if not more, as the United States. And in keeping with the analogies, considering a major US metropolitan center, Detroit, recently went bankrupt, it is only fair that Europe should sacrifice one of its own historic cities to the gods of negative cash flows. The city in question, Rome, which as the WSJ reports, is “teetering on the brink of a Detroit-style bankruptcy.”

Rome, the eternal city, which survived two millennia of abuse from everyone may be preparing to lay its arms at the hands of unprecedented corruption, capital mismanagement and lies

On the first day of his premiership, Matteo Renzi had to withdraw a decree, promulgated by his predecessor, that would have helped the city of Rome fill an €816 million ($1.17 billion) budget gap, after filibustering by opposition lawmakers in the Parliament on Wednesday signaled the bill had little likelihood of passing.

Devising a new decree that provides aid to Rome will now cost Mr. Renzi time and political capital he intended to deploy in promoting sweeping electoral and labor overhauls during his first weeks in office.

For Rome’s city fathers, though, the setback has more dire consequences. They must now face unpalatable choices—such as cutting public services, raising taxes or delaying payments to suppliers—to gain time as they search for ways to close a yawning budget gap. If it fails, the city could be placed under an administrator tasked with selling off city assets, such as its utilities.

“It’s time to stop the accounting tricks and declare Rome’s default,” said Guido Guidesi, a parliamentarian from the Northern League, which opposed the measure.

Alas, if one stops the accounting tricks, not only Rome, but all of Europe, as well as the US and China would all be swept under a global bankruptcy tsunami. So it is safe to assume that the tricks will continue. Especially when one considers that as Mirko Coratti, head of Rome’s city council said on Wednesday, “A default of Italy’s capital city would trigger a chain reaction that could sweep across the national economy.” Well we can’t have that, especially not with everyone in Europe living with their head stuck in the sand of universal denial, assisted by the soothing lies of Mario Draghi and all the other European spin masters.

So what is the catalyst that would push the city into default? Trash.

No really: an appeal for a €485 million transfer from the central government to compensate Rome for the extra costs it incurs in its role as a major tourist destination, the nation’s capital and the seat of the Vatican. “Rome is unique compared with other cities” and deserves state support because of huge numbers of visitors who use services but don’t contribute much to the economy, Mr. Marino said in a recent interview. But even before the government of Enrico Letta fell this month, the proposed transfer had prompted complaints that the aid was unfair, given the dire straits of other cities.

Rome has long struggled to balance its books. Because of its dearth of industry, the city depends heavily on trash-collection levies and the sale of bus and subway tickets. It struggles much more than other European cities to collect either one. About one in four passengers on Rome’s public transit system doesn’t buy tickets, costing around €100 million in lost revenue annually, compared with just 2% of passengers on London’s public transit network.

Meanwhile, employee absenteeism at Rome’s public-transit and trash-collection agencies runs as high as 19%, far above the national average.

But how can Rome’s clean up costs be a surprise? Well, they aren’t. What is however, is the severity of the recession that crushed the national economy.

Just six years ago, some €12 billion in city debts was transferred to a special fund subsidized and guaranteed by the national government in a move aimed at giving Rome a fresh start. But Italy’s economy has shrunk by almost 10% since then, eroding the tax base just as national austerity programs pushed extra costs onto local governments.

Even before the withdrawal of the “Save Rome” decree, Mr. Marino was facing unpalatable choices. He has already raised cremation and cemetery fees and plans to centralize city procurement, which he says will save €300 million a year.

Now, without the transfer from the central government, he may be forced to impose income and property tax surcharge—already among the highest in the country—and to cut salaries to the city’s 20,000 employees or trim city services such as child-care centers or job-training programs—also unpopular moves.

What would happen then is unknown, but hardly pleasant:

The political fallout could be severe. The mayor of Taranto, a southeast city that defaulted on €637 million in debt in 2006, has suffered some of the lowest poll ratings in the country after cutting back services.

Oh well, another government overhaul is imminent then, after all it is Italy. Just as long as it is not elected. Because then there woud be a chance that someone who actually sees behind the facade of lies, like Beppe Grillo for example, may just be elected PM, and then all bets are off.

Howeber, that will never be allowed, and instead Rome will almost surely be bailed out. That however would open a whole new can of worms as every other insolvent city demands the same treatment:

A new appeal for a special transfer to Rome could embolden demands that other cities in distress be helped, even though Italy’s public finances are already strained. Naples is close to having to declare bankruptcy. Reggio Calabria has been run by a special commissioner for the past three years, but may still default on €694 million in debt, according to Italy’s Audit Court.

And if all else fails, there is the nuclear option: “Some politicians say Rome should sell assets such as ACEA, the electric utility that is worth about €1.8 billion and is 51% owned by the city.

True: and Goldman, or some other bank filled to the gills with the Fed’s generous excess reserves, would be happy to swoop in and scoop up hard Roman assets providing it with just the right cover for creeping global encroachment. The benefactors? A select few equity shareholders. Because for every million or so peasants who suffer, a few rich men have to get even richer in the New Feudal Normal.

G-20 Agrees To Grow Global Economy By $2 Trillion, Has No Idea How To Actually Achieve It | Zero Hedge

G-20 Agrees To Grow Global Economy By $2 Trillion, Has No Idea How To Actually Achieve It | Zero Hedge.

Apparently all it takes to kick the world out of a secular recession and back into growth mode, is for several dozen finance ministers and central bankers to sit down and sign on the dotted line, agreeing it has to be done. That is the take home message from the just concluded latest G-20 meeting in Syndey, where said leaders agreed that it is time to finally grow the world economy by 2% over the next 5 years.

The final G-20 communiqué announced its member nations would take concrete action to increase investment and employment, among other reforms. “We will develop ambitious but realistic policies with the aim to lift our collective GDP by more than 2 percent above the trajectory implied by current policies over the coming 5 years,” the G20 statement said.

Australian Treasurer Joe Hockey, who hosted the meeting, sold the plan as a new day for cooperation in the G20.

“We are putting a number to it for the first time — putting a real number to what we are trying to achieve,” Hockey told a news conference. “We want to add over $2 trillion more in economic activity and tens of millions of new jobs.

And to think all it took was several dozen of politicians sitting down for 2 days in balny Syndey and agreeing. So over five years after the start of the second great depression the G-20 has finally agreed and decided it is time to grow the economy: supposedly the reason there was no such growth previously is because the G-20 never willed it…

There is only one problem: the G-20 has absolutely no idea how to actually achieve its goal of boosting global output by more than the world’s eighth largest economy Russia produces in a year. Nor does it have any measures to prod and punish any laggards from this most grand of central planning schemes. From Reuters:

There was no road map on how nations intend to get there or repercussions if they never arrive. The aim was to come up with the goal now, then have each country develop an action plan and a growth strategy for delivery at a November summit of G20 leaders in Brisbane.

 

“Each country will bring its own plan for economic growth,” said Hockey. “Each country has to do the heavy lifting.”

 

Agreeing on any goal is a step forward for the group that has failed in the past to agree on fiscal and current account targets. And it was a sea change from recent meetings where the debate was still on where their focus should lie: on growth or budget austerity.

So who is the mastermind behind this grand plan? Why the IMF of course: “The growth plan borrows wholesale from an IMF paper prepared for the Sydney meeting, which estimated that structural reforms would raise world economic output by about 0.5 percent per year over the next five years, boosting global output by $2.25 trillion.”

The same IMF whose “forecasts” can best be summarized in the following chart (which will be revised lower shortly to account for all the snow in the Northeast US):

 

Aside from this idiocy, the other topic under boondoggle discussion was the fate of the taper, and specifically how emerging markets will (continue to) suffer should the Fed continue to withdraw liquidity. Here, once again, the developed nations won out, leaving the EMs, and particularly India’s Raghuram Rajan – who has been pleading for far more coordination between central banks in a time of globla tightening – high and dry.

  • RBI’S RAJAN: POLICY TIGHTENING MUSTN’T UPSET GLOBAL ECONOMY
  • RAJAN SAYS INFLATION IS HURTING GROWTH
  • INDIA’S RAJAN SAYS BRINGING DOWN INFLATION BIGGEST CHALLENGE
  • RAJAN: DEVELOPED, EM NATIONS AGREE ON NEED TO CALIBRATE POLICY

What inflation? As for coordination, here is what the G-20 did agree on: whatever Yellen says, goes:

Financial markets had been wary of the possibility of friction between advanced and emerging economies, but nothing suggested the meeting would cause ripples on Monday. “The text of the communiqué indicates that the standard U.S. line that what is good for the core of the world economy is good for all seems to have won out,” said Huw McKay, a senior economist at Westpac, noting there was nothing that could be taken as “inflammatory” about recent volatility in markets.

 

There was a nod to concerns by emerging nations that the Federal Reserve consider the impact of its policy tapering, which has led to bouts of capital flight from some of the more vulnerable markets.

 

“All our central banks maintain their commitment that monetary policy settings will continue to be carefully calibrated and clearly communicated, in the context of ongoing exchange of information and being mindful of impacts on the global economy,” the communiqué read. There was never much expectation the Fed would consider actually slowing the pace of tapering, but its emerging peers had at least hoped for more cooperation on policy.

 

Hockey said there had been honest discussions among members on the impact of tapering and that newly installed Fed Chair Janet Yellen was “hugely impressive” when dealing with them.

Indeed, in the three weeks that Yellen has been Chairmanwoman, she has been truly hugely impressive. It’s the next three years that may be more problematic.

Ponzi World (Over 3 Billion NOT Served): Collapse-O-Nomics: Commonsense is Extinct

Ponzi World (Over 3 Billion NOT Served): Collapse-O-Nomics: Commonsense is Extinct.

No Reasonable Idea Will Go unClusterfucked by the Idiocracy
The Lost Boys continue to decry today’s “Keynesian” policy failures – this obviously ludicrous idea of borrowing the economy out of debt. However, when I took (Macro) Econ 101 way back in 1987, the Professor at the time – an ardent Keynesian – taught us that correct application of fiscal stimulus is to run deficits during recessions and surpluses during expansion. Therefore, in the context of a typical five year business cycle, that would lead to one year of deficit followed by four years of surplus and hence a balanced budget (if not net surplus). However, today’s Keynesian bashers don’t know any of that, because they never took Econ 101 nor even Commonsense 101. These Keynesian bashers are as deluded as the Krugmanites who think they too know anything about appropriate use of fiscal policy. No sane doctor would prescribe using antibiotics for 30 years straight and then declare like a dumbfuck at the end of it all that antibiotics don’t work. This is all just a game by and for morons of which there is no shortage on all sides of this equation.

Keynes Didn’t Envision Reagan, Bush or Faux News
Unfortunately, Keynes never envisioned the Idiocracy, nor how bastardized his policies would become over the course of time, when placed in the hands of hill billies and B Actors looking for a retirement gig. Fiscal policy was never intended to sponsor tax cuts for the ultra-wealthy, military blunders, nor military build-ups. Nor did he envision this concept endorsed by Krugmanites of bailing out a 30 year leveraged consumption binge and multi-year housing boom via the application of totally unlimited government borrowing. And needless to say, he never envisioned monetization of debt solely to prop up the stock market while the real economy was outsourced in the background. All of this chicanery is the result of what happens when Frat Boys go to college to socialize rather than to get a real education. They become very good at pretending to know things, while having absolutely zero judgement as to how these policies need to be applied in order to be effective. In other words, a little bit of knowledge is an extremely dangerous thing.
Extreme Deflation Doesn’t Mean Cheaper Computers at Best Buy
Keynes himself was an extremely intelligent man – whose ideas were far beyond the grasp of today’s policy-making game show hosts. Anyone who has ever read “The General Theory of Employment, Interest and Money” is standing on the shoulders of an intellectual giant, if they understand what he is saying, at all. Moreover, the problem he was trying to solve was how to mitigate the devastating human impacts resulting from The Great Depression. He was addressing a real depression, not a three month hiatus from shopping binges and expensive dinners, which is what the Idiocracy deems to be this recent “great recession”.
Worse yet, the Lost Boys seem to believe that deflation means lower prices at Best Buy. Unfortunately in a real depression, deflation means a total collapse in demand leading to a collapse in prices. In a fixed cost-based world wherein all corporate entities have taken full advantage of 0% interest rates to maximize financial leverage – then deflation means bankruptcy. In other words, every possible mistake that could be made leading up to this lethal juncture, has been made, specifically around subsidizing cheap debt. In a fixed cost world, deflation means mass unemployment and accompanying turmoil. Which gets us to the next point.
The Polling Booth (and/or Molotov Cocktail) is the Final Arbiter of all Economic Theories
The rule of one vote per woman or man can work eventually. In the interim, however, it may not work well, if at all. The subversion of democracy via mass brainwashing aka. Faux News in addition to the dumbing down of a population via junk food and junk culture, is a lethal combination. In the interim, democracy can lead to any ludicrous outcome including the mass accumulation of wealth in the hands of an ever-dwindling minority.
Ultimately, however, there is only so much pain the masses can take and then they revolt. At that point, political democracy becomes economic democracy. No one can predict what new bastardized economic model will result from this ensuing pandemonium, however, rest assured it will look nothing like the current one.
In other words, in the fullness of time, economics and politics are one and the same. No economic model regardless of how textbook “efficient” it is deemed to be, can indefinitely withstand the polling booth. That’s just one more lesson that today’s frat boys and billionaires are going to find out the hard way. The future will not be about what a handful of entitled people want for themselves, with zero concern for their fellow man. That childish fantasy will be flushed down the toilet of history, where it belongs.The Pendulum Swings
At this late juncture, the political pendulum is still hard to the right on economic policy, not withstanding the feel good election of Obama to Bush’s third and fourth terms. The political economy is the furthest to the right it has been since the early 1900s just prior to the Great Depression, during the heyday of the “robber barons”. Today’s power elite have pushed their luck to the absolute limit and then a lot further. What they don’t realize is that momentum has halted and the pendulum is getting set to swing back in the other direction. The Idiocracy has been conned into voting against their own economic interest for thirty fucking years straight. It’s an unprecedented run in modern history. When the political pendulum begins to swing the other way, the status quo political ideologies will be obliterated in lockstep with the status quo pseudo-economy. The recalibration will be instantaneous and the elite’s grasp on power will be challenged, violently.

Commonsense Doesn’t Sell Text Books
Lastly, this omnipresent buffoonish devotion to economic ideology – Keynesianism, Monetarism, Austrianism, Communism, Socialism, Capitalism etc. has meant that commonsense has been thrown out the window. Commonsense of course being the only moderating control rod in all of these economic “systems”. However, to be a commonsense-based centrist is to be seen as being weak and lacking confidence. Clearly, the “best ideas” deserve slavish unquestioning devotion. Unfortunately, in the real world, all of these theories – which is what they are – have massive flaws so wide you can drive a truck through them, therefore it’s only a matter of time before their brainwashed proponents take the application of theory to the ludicrous extreme, at which point these “systems” all collapse in their own uniquely spectacular fashion.Voila.

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