Perspective and Time-Frames

When I have read other claims of coming doom in the past I have always rejected them. They seemed to me to regard the economy much like a mechanical clock, with certain elements of the economy as having overwhelming power. Those claims that our economy was going to collapse within a certain time-frame never came true. Some of these claims were made by rank amateurs, but some weren’t. A certain historian has recently argued again for a coming collapse, and I have the same regard for him. The great economist Henry Hazlitt wrote in 1983 (The Inflation Crisis, and How to Resolve it) that the U.S. economy would drive itself into hyperinflation, but again, didn’t happen.

It is obviously possible to foresee limited crises in the near future as Ludwig von Mises did in the 1920s and famously Peter Schiff did preceding the recent financial crisis. But here I am talking about even a larger failure than the mortgage-backed securities mess.

So, why am I willing to now put myself out on this limb after I have shown such good sense before? Two reasons: The first is our current situation.

Remember the tech-stock bust of 2002? Do you realize that the next bust was about five years later, beginning in 2007? Remember that 2004 through 2006 were decent years. If the bottom was in 2008, then we are now five years in and there is not actually a recovery. We have rehired very few of the people who lost their job in the crash, and most of them are not in jobs with the same level of productivity. Businesses are profitable still because of cost cutting, and are doing little new investment. We are stagnating.

We aren’t stagnating because of government spending but because of the continued, increasing attack on business and banking through rapidly expanding regulation. After about a century of increasing and improving regulation which limited our growth but didn’t seem to have a visible result, the government is finally beginning to make an obvious mark on our economy.

Reason two: the numbers regarding our future problems are too large. They are large enough to be killing. And, as I explained in my last post, large enough that our economy cannot possibly meet the requirement, with or without the entitlements, with or without a reduction in spending.

One additional reason, which I do not see mentioned anywhere, is that our economy is very dependent upon its technology. No country of our size or complexity has ever faced major problems. The most advanced economy that has faced extreme issues is Greece, and it was not particularly industrialized, and is not at all dependent upon technology. Today, it has massive unemployment and is now considered a “developing” country. It is a good thing that it has a relative small population. Greece still lives much closer to the land than most countries in Europe.

We don’t.

From today’s vantage point, I consider it possible that in a couple years all of Dodd-Frank and the other new regulations will finally be in place and business will find a way to survive. We could see a period of small, but moderately stable growth. There will be lots of possible threats to our economy, mostly from outside. Some examples include: Another terrorist attack. The Chinese personality split, i.e., communist/capitalist, could come apart. (That connection is so explicitly M1 in so many ways.) Japan’s attempt to “ease” their way out of stagnation, after a couple decades of various kinds of “easing” failed, could surely lead to a worse case. The economy in Europe will fracture again. Islam could completely take over much of the oil supply. The list is nearly endless.

But even if we are able to accommodate the regulations, at some point things will come apart from our increasing debt load and the growing demands of the entitlement programs and/or our aging population.

We could go through a couple more financial crisis as we saw in the last decade. I predict that each one will be more severe, and depending upon how vindictive the politicians are, move difficult from which to recover. And each time capitalism, businesses, and bankers will be blamed. That scenario would be more like a death spiral.

All of that that means that we have even more reason to work now to reverse the entire process. As Yaron Brook has said, not being involved, not being active is no longer a rational option. Don’t act now and you will necessarily live to see the big mess. Certainly your children will.

Will that collapse correspond with the rise of an M2 religious dictatorship I don’t know. We will certainly be ripe for it.

The Fiscal Cliff and the Whole Context

These days we are swamped with TV and internet coverage of the fiscal cliff scheduled to occur on January 1st. What the cliff amounts to is a reduction in government deficit spending, which in itself is a good thing. But, since the deficit would still be astoundingly and disastrously large, the cliff isn’t as big a deal as one would wish. That the “cuts” are in fact just reductions in the rate of spending increases and not reductions in spending, it is clear that the whole thing is mostly a sham (e.g., see).

On the other hand, since the reduction in the deficit would be mostly tax hikes, the pain would fall on the productive population. In the context of the economy, it is spending that needs to be reduced. An increase in taxes would be an additional drag on the economy, increase the rate of the decline of our standard of living, and enhance the movement toward destruction of rights and the importance of the individual in our society. What happens with the fiscal cliff could hasten the slide toward a fate like Greece or Spain. We really don’t want that to happen. Of the options that Obama seems to accept, i.e., no deal or higher tax on high incomes levels and no spending cuts, I find it hard to choose. There is some indication that BO wants a limited increase in taxes and increases in spending, which could be worse.

But the fiscal cliff is just part of the problem: the hoopla over the “fiscal cliff” provides a smoke screen covering additional pending disasters for our economy, namely, the beginning of the implementing of ObamaCare taxes and regulations, and the coming tidal wave of Dodd-Frank and other anti-business regulations.

Quite possibly the impact of Dodd-Frank will dwarf the fiscal-cliff. It has already drastically restructured parts of the financial community. There are many regulations still to be issued from Dodd-Frank (many are already late) and they all are intended on reducing the range of options of a financial institution, which will lower its profitability, more tightly limit its decision making capability, and reduce its ability to fund American production.

ObamaCare has many elements (some still little known) that will be instituted in 2013 that will raise business costs, lower employment, and cause further problems with health insurance and medical costs. All of these together, including whatever nonsense ends up as the “solution” to the fiscal cliff, will mean slower growth, or possibly recession for the US economy (which won’t be good for the world economy either).

Think what that will mean for the federal deficit and budget.

We have seen many projections as to when the federal revenue will equal the sum of interest payments on debt, Social Security, and Medicare, in other words, severe problems with funding the government and retaining the appearance of the safety of government debt. If you look closely at each, I expect that you will see that the assumptions include some growth in the US economy and that there will be a significant number of people paying the Social Security and Medicare taxes. But, with four more years of BO and the total number of people employed remaining low (as opposed to actually producing; and as opposed to the unemployment figures that are meaningless), tax revenue, including FICA, is not going to grow while the interest on federal debt, even at today’s absurdly low levels, Social Security and Medicare demands will grow rapidly. The only way to pay for defense and the astounding number of programs the federal government supports, is to constantly grow the deficit. It is also possible that Obama will try to raise taxes, but that may be too obviously destructive for today’s population.

The federal deficit will be the tipping point, but the real cause of death for our economy is the restrictions on doing business and producing. The arguments about spending and deficits need to begin including emphatic emphasis on the disaster of regulation.

For us, the unwilling and resisting passengers on this train into the tunnel of death, it means that we need to arrange our thinking to prepare personally and philosophically. I will leave to you the personal preparations (I am thinking about a potential blog post on this topic.)

Philosophically, we need to emphatically tell anyone we can that the coming mess is not the result of capitalism or selfishness (maybe we can equate blaming the Jews in Germany after WW1 with blaming capitalists). That is in addition to the stuff we are already doing, e.g., focusing on helping ARI and other similar activities and aiming at the destructive educational system we have.

And now for a final comment that is going to be a theme for me:

Understanding the Objectivist philosophical method is vital to anyone concerned about his freedom, as well as his life in general, of course. Recently I have been getting my own intense reminder. I have been reading Understanding Objectivism and The DIM Hypothesis. I want to emphatically recommend these books. If you want to understand an individual’s mental functioning, UO is the book to read. It is also helpful in leading up to the other one. To better understand the trends and conflicts in our own situation here in the US, The DIM Hypothesis is absolutely necessary. It is very philosophical. But philosophy matters, and our conflicts today are philosophical. For your own sake, read them.

Personal Responsibility

Recently, Don Watkins, in a blog posting (I can’t find the specific post for some reason, but it was on http://capitalism.aynrand.org/, which is very good), referenced an article arguing that anyone who tries can succeed, at least to some level. This article was written recently and not one hundred years ago. Now, I don’t disagree with its basic sentiment. I especially agree that one should take responsibility for one’s welfare and future. Further, I emphatically agree that we live in a world where it is possible to make our own way, metaphysically speaking. But, as I read the article, I kept wanting to ask the author if he’d been paying any attention to what has been happening in our economy and culture now, and for the last one hundred years.

I know why Dr. Watkins referred to the article. It is rare to find anyone who is willing to say anything good about personal responsibility today. Any such sentiment needs to be encouraged. But, in fact the article is wrong in its application to today’s America. Personal responsibility is not encouraged. Personal success is often disparaged (not by business people, but certainly within the culture). Most important, the government has been actively attacking personal success and making it more difficult for a long time.

I think that it is difficult to succeed today and becoming more so. I think that the article should have had some important provisos. I mean, haven’t we been saying that it matters what the government does? Haven’t we been arguing that man needs to have certain conditions to succeed and that the U.S. government has been moving away from those conditions.

Now, in order to make sense of the issue of personal responsibility in our context certain basic notions have to be made plain. Most important, and thus first, is that if man’s life is the standard of value, the actions by individuals based upon their own understandings and judgment is the only way in which human survival is achieved and prosperity or progress, in any rational sense, occurs. It isn’t the action, or the amount of effort, or the “work” done that is the cause of success, but the use of reason and the resulting ideas, and their correspondence with the real world. Nor does good reasoning guarantee success. A rational man can fail, even in a rational or free environment.

But, we are not living within a rational environment. We are living within an advanced welfare state with millions of regulations, probably a million regulators, and an endless number of imposed government costs of doing business. In business after business, the risk of failing to meet some idiotic government regulation or expense has become greater and greater. Starting a business was always risky. Small businesses have always failed at very high rates.

And then there is the issue of what our personal responsibility is.

Some guy on facebook told me that people on Social Security were deadbeats, and we shouldn’t care what happens to them. But after nearly one hundred years of regulation of the financial sector, the chances that most Americans can save sufficiently for retiring, at nearly any age (not to mention the costs of health care after fifty plus years of government interference in the medical industry), is nearing zero (see my blog post). Many people, if not most, who are dependant upon government retirement money are victims.

Most importantly, the facebook guy had the cause and effect backwards. While it is true that there are some people who duck personal responsibility, at least in America that percentage is a minority. It is also true that some people are misled by the claim that their forced savings by the Social Security tax, for example, does lead to some level of personal protection at retirement. Neither type of group explains the large numbers of people who end up dependent upon Social Security.

What does explain those figures is the consequences of government actions in the economy. Just to point the finger at one element (out of a list of hundreds), look at the disconnection between savings and capital entailed in the policies of the Federal Reserve Board. The Fed thinks that the economy works best with an annual increase of price levels at two percent. This means that in just ten years, a dollar loses well over twenty percent of its purchasing power. At the same time, the Fed has driven interest rates down to very low levels. The interest rate offered by the standard savings account will not allow the saver to keep up with price inflation, especially after income taxes. To try to make ones savings work and grow, people have been forced to become investment professionals. However, the Fed’s policies have resulted in asset booms that have in fact left Americans with considerably less wealth.

The facebook guy is blaming the victim for the consequences of government actions.

Ayn Rand didn’t write about this issue directly. But she was asked about it. One response is on point. She was asked about unemployment insurance. The questioner clearly expected that Miss Rand would condemn the person taking the government money, but she didn’t. She said, “Government controls create unemployment. No matter what happens to your employer, if you are out of work today, why should you protect him and starve? There cannot be individual responsibility for something that is the government’s fault. In any situation where the government creates a hardship that pushes you into a position of martyrdom, you are morally justified to take advantage of whatever money is offered to you, provided you don’t spread the kind of ideas that created the trouble.” (Ayn Rand Answers, p. 124) (Note that Ayn Rand kept her wealth earned from her writing in savings accounts.)

Fundamentally, we are not individually responsible for the consequences of government actions. Nor can we hold other individuals responsible by demanding that they suffer when they are victims. In a society that is attacking the innocent, we are now in a lifeboat context, and the rules of morality apply differently. Condemning the victim, the innocent, is joining the government. It is corrupt. It is evading the cause. It makes finding the correct solution nearly impossible.

If we tell someone who can’t find a job because of government interference, say minimum wage laws or restrictions starting a new business, that he isn’t taking personal responsibility, we are doing the liberal’s job. We need to be telling him that he, too, is a victim. If he is to have a future he needs to live within capitalism.

If we then tell someone who wasn’t able to save for retirement and sees the cost of living and their medical expenses rising beyond reach that they didn’t take personal responsibility, we are doing the liberal’s job. We need to be telling him that he, too, is a victim. That if he is to be able to live, and even enjoy his old age, he needs to live within capitalism.

If we then tell someone who is poor and uneducated that they are failing to take personal responsibility, just because they are poor and uneducated, we are doing the liberal’s job. We need to be telling him that if he does not want to remain poor and if he wants an education of any kind, he needs to live within capitalism.

The only other option besides capitalism is a declining economy and ultimately depression and perhaps the collapse of civilization.

Let’s keep the cause and effect clear. Let’s not advocate policies that will further harm the victims. For example, declaring that we must first stop the entitlement programs before we have a functioning economy (meaning one that can create wealth) only means that we are telling people that they will have to suffer without hope. Yes, there will be some suffering in any event. But telling anyone that will have to suffer is only justified if we are moving toward capitalism, which means a free economy. So first we have to liberate the economy. Then we can cut the entitlements. But if we don’t begin with freeing the economy, we will only add suffering without the possibility of a prosperous future.

The Financial Realities of Individual Retirement

I am writing this for several reasons but one important one is to further establish the importance of paying attention to the real world when attempting to make policy recommendations like some recent suggestions as to how to deal with the entitlement mess.

To begin, let’s review the current situation:

1. The current ideal is to retire at age 65 and live in blissful non-productivity for 20 to 30 years.

2. Up until the 90s, it was expected that a worker would accumulate pensions from his employers over the years and when he retired he would receive a fixed income to support him. These pensions have been disappearing steadily for decades and there only a few left for new hires. The health of company savings to support existing pensions is in question. There is a federal agency that would supposedly put funds into a failing pension fund, but it is underfunded itself and could not rescue an economy wide problem (such an agency shouldn’t exist, either). (For example, see)

3. Self-funded retirement plans, such as the 401(k), have been shown by repeated surveys to be insufficiently funded by employees to provide for their retirement. The gap is very large. Employees also have the tendency to remove the funds from retirement accounts at various times for various reasons.

4. Survey after survey has documented that Americans have a very poor grasp of how to manage their savings and investment, including retirement accounts. The primary element driving most decisions is fear of loss. The sources of their fear are stories about the Great Depression, reading newspaper headlines, incomprehensible discussions of investment options, stories of thief and greed, and the economic chaos around them.

5. Retirees are becoming increasingly dependent upon Social Security and Medicare after retirement (see below).

6. The government dominated economy has resulted in two major recessions in the last ten years resulting in the current period that is described by the government and press as a recovery but feels very much like a bad, senseless downward spiral.

Consider the situation of a reasonable, hardworking, educated baby-boomer who has been successful from the standpoint of the quality of jobs and his level of income. Let’s call him Max. Max is 62 and all his life he has accepted the idea that age 65 he will retire. As a responsible person, he has saved and tried to make sound investments his entire life. He has not hired professional help other than talking to various stockbrokers. He began working as adult in 1972 but didn’t begin paying attention to the issue of savings for several years. His initial experience in the 70s was with high inflation and then the recession that ended in 1982.

But Max has now entered what will surely be remembered as the golden years of investing for the baby-boomers. From 1982 until December 1999, the market rose nearly continuously (for example, 1987, which is remembered as the year of a crash, was actually up slightly for the calendar year.) The later 90s were somewhat skewed by the inflation fueled tech boom, but overall, the period was the best of the Twentieth Century.

Since 1999, the investment markets have flattened or worse. Consider that the inflated high of the Dow Jones Industrial Average of December 1999 was 11497. As I write the Dow is 11471 (and in my opinion, it is over priced). After nearly twelve years, the Dow sits at the same place, nominally. I say nominally because the dollar today is not the dollar of 1999. If we accept the government Consumer Price Index as a real measure of consumer prices over time (I am not advocating using the CPI, but I don’t know of a good alternative.), since 1999 the dollar has fallen over two percent a year. According to the Department of Labor’s online inflation calculator, it takes $1.36 today to buy the same stuff as one dollar in 1999, or today’s dollar is worth $0.73. (The same calculator gives the today’s figure of $234.76 in relation to 1982.) That means that if you correct for inflation today’s Dow is 73% of what it was, or 8434, not 11471. Even if you add in dividends and subtract taxes (capital gains taxes as well), you have a result that a general investment in American productive assets for the last twelve years has been a very large loss. Max has suffered a major blow to the prospect of a comfortable retirement. Maybe Max may not be able to retire at all, even with Social Security, although I am not sure that there would a job for Max when he needs it.

How could Americans prepare for retirement in such an economy?

Most prescriptions offered for investing for retirement assume an economy that is growing. Those recommendations didn’t work in the decade ending in 1982 and they aren’t working now. There are recommendations for periods of crashes and depressions. If these ideas work at all, they generally don’t work for prolonged periods of time. There are other approaches that do work to a certain extent and are good. However, they tend to be complex and assume knowledge that few have. They also wouldn’t work if widely practiced (which is to say that I am here concerned with the general situation and not how an individual could protect himself). For the vast majority of people, there is no good investment option today that will help them through to their last years.

Another little known fact is that those people who have saved some assets for retirement have often not actually planned. Their accumulation was based on what they could save and invested in what made sense at the time. Many, when they retired, accepted the conventional wisdom that retirement income needed to be “income without undue risk” and placed significant amounts in bonds. These people will tend to run out of money even faster during retirement. They don’t have enough to support their rate of spending for very long. Nor do they or their advisors have the tools to recognize the threat and make changes early enough to make a difference. They have not made provision for consumer price inflation or the rapidly rising cost of medical care. They aren’t prepared for 20 years or more of idleness. They just don’t know how to plan financially and don’t know they should.

For the many people who keep whatever they have managed to save in “safety of principle” accounts (fixed annuities, savings accounts and CDs) or fixed income accounts (bonds and pensions), they have seen their assets and income slowly decline as the Fed has kept interest rates low, inflation continues, and the what small income they receive is taxed. People with bonds have seen their principle increase as interest rates and their income have declined. But, if they are paying attention, they know that the future probably holds higher interest rates (see Greece, Spain, and Italy today), and their principle will drop like a rock if they still hold those bonds.

Beyond that it should not be surprising that very few people have any idea of how to invest. They do not know how the economy works. Where would they get that knowledge? It isn’t taught in schools at any level nor do the academics actually know anything about the real economy. They don’t know how retail businesses work. They don’t know how manufacturing works. They don’t know how businesses make profits. They don’t know how international commodity or currency markets work. They really don’t know why stocks have the prices they have or why they change, short term or long term. The ignorance about economics or our economy is more than widespread. It is terminal. Who suggests that it is important to know? People learn about their own professions, but often not much beyond that. Business schools are not good sources, either. Most businesses have to retrain business school grads, even MBAs. It is no wonder that few people are able to save and invest in a manner that will successfully support them into their 90s, especially if they retire later than normal. The number of people who do adequately save and invest has to be less than five percent.

A realistic look at today’s economy would suggest that the foreseeable future does not hold the promise of better results. There is no indication that anyone in authority has a clue as to what makes an economy grow and contract. They do not even understand that only productive, profitable jobs are worth creating. Government debt will continue to pile up. The Fed will continue to add stimulus, achieving nothing but a huge financial overhang that may fall and crush us. Don’t forget that the regulations required by all of the reform bills after the Meltdown in 2007-8 have yet to be released and implemented.

It seems to me that any criticism of people for not being prepared for retirement is not based upon a recognition of the facts of the real economy. Only a very few are going to have found a method to invest their savings in such a way to be able to support themselves if they retire.

To sum up, it is very difficult for salaried or wage paid individuals to save and invest successfully for their retirement, standard pension plans have suffered significantly due to the economic conditions, and from other sources we know that Social Security and Medicare can not continue for very long. So, what can we conclude? My conclusion is that the mixed economy, the welfare state in the United States, cannot support the coming old age of the baby boomers, with or without Social Security.

These problems that people have with their savings and investment, the nature of our economic situation, and the poor future prospects are not the fault or the responsibility of individuals. The responsibility lies with the people who control the dominate actor in our economy, the Federal government in its many aspects: the President, the Congress, the Fed (and the intellectual leaders who guided them).

What else did you expect from 100 years of constant legislative attacks on capitalism and the businesses in the United States. That the problem has not been big until now is a testament to American perseverance. It couldn’t last forever.

For the future to achieve the promise of a happy old age, not to mention prosperity for everyone, in the US, a couple things have to happen:

1. The economy has to be freed up to become productive and prosperous. In other words, our country needs to become a capitalist nation. The process of transforming ourselves from a welfare state to a nation that recognizes right must do so in a manner that does not further victimize the present day population, as I discuss elsewhere.

2. People need to revise their thinking about retirement and work. Work is not the onerous thing most people make of it. Retirement for 20 or 30 years, after working for 40, is not generally feasible in good situations, let alone the one we are in today.


This Post is one of three that deal with the issues connected with the entitlement mess and how to resolve it. All three should be read in order to fully understand the issues. The other two Posts are:

A Flight of Fancy (Not Fantasy)

The Right Way to Solve the Entitlement Problem


Thank you.

C.W.

Outlook: The Economy and Inflation

If I haven’t mentioned this before, let me do so now: keep an eye on “business news”. So many people are focused on the political issues that they don’t take time to look at the business pages. People also tend to consider business news as very specialized, I think. I mean that the stories involve finance and accounting concepts that are not sufficiently understood by the average, intelligent person. I would agree if the articles on the business pages in the normal daily newspaper or news web site were about actual businesses and markets, etc. Most articles, unfortunately, are actually about the government and its activities. What would pass as actual news in the business world is ignored there just as real news is ignored in the other sections. Further, the “reporters” in the business section are not people with an education in business, finance, or economics. Nor do they have business backgrounds or even a history of intelligent investing. They are people with journalism degrees who could not make it to the front pages. Years ago someone did a survey of the people writing for Money Magazine. They found that few of the writers had any investment background. The writers for Money Magazine were young, inexperienced, and had bought into the Money Magazine “philosophy” (and advertising strategy) without question.

So it would seem that I have just given you good reasons to ignore the business pages. Well, even so, it is the reports on the government that you need to look out for. A few of those reports are considered significant enough to reach the front page. Many of the others are important to know about. You need to have a broader view of the economy we live in and its prospects to better understand what could happen in the future. You need that for yourself, to better plan for yourself and your family.

For example, some people are carrying on about high inflation and you might think that inflation is raging and creating havoc. Look around you. Do you see prices in general going up? Significantly? There is some, of course, but nothing big has happened as of yet and may not for a while. People who are carrying on about inflation happening now are ignoring the actual situation. (I am not suggesting that there is no threat of inflation or hyperinflation. There is. But it is a threat, a possibility and can be avoided.) Many people are ignoring the issues of Social Security and Medicare and their impact on the budget, today. You don’t keep track of this stuff without looking at the business section (and reading this blog, of course!).

Okay, so lets talk about outlook, or what I have called the Inflation Watch in the past. This time I am broadening my focus.

In spite of all the pushing, money pumping, stimulating, and general noise making, the government, including BO and Bernanke, has been unable to get the economy functioning, producing consistently, and growing. They don’t know why. Their mental framework, the “understanding of the world” they utilize to make decisions, has not brought them to the shining success they expected. But don’t despair; they know why it didn’t work. We didn’t cooperate, we being the banks, the business, the capitalists, the consumers, all of the non-government types. It is our fault. They will just have to try harder. Don’t worry. They, BO and his gang and Bernanke and his colleagues, will not question their ideas.

In the meantime, the economy is floating along, not improving, deteriorating marginally in areas that are hidden. More houses are being foreclosed upon (funny how there are few if any news reports about foreclosures these days, which was big stuff a year or two ago). BO is considering “restructuring” Fanny Mae and Freddy Mac. You know that won’t be good.

There is more unemployment and few new jobs, relative to the available workforce. (Notice that in my area, just outside of Washington, DC, unemployment is low. Isn’t that strange. Notice also the various comparisons between federal government employee incomes and the private sector.) Industrial production rose for a while, but has now slowed, if not stopped growing. Imports are again exceeding exports significantly, and the gap is growing. The balance of payments (all money transfers as opposed to just trade) shows that foreigners are still keeping dollars (idiots).

Not to be left out, foreign governments are doing just as much to screw things up as the U.S. government. Many who are looking at the Chinese to be shining stars are ignoring the fact that their Communist government believes in doing the same thing that the U.S. government does. We are the great capitalist nation and the Chinese are emulating us.

Someone could reasonably say to me that it isn’t really today that we need to be worrying about. It is the future, maybe the intermediate future. I agree. There are certainly significant seeds of terrifying doom planted in today’s economy, i.e., the debt, the made-up money at the Fed, the lack of any savings available for investment, the flood of new regulations, etc. The list is very long. Even worse is the lack of understanding of the true nature of the situation where the decisions are being made or where the decisions are being evaluated, i.e., the press.

Nevertheless, the American economy is not just the government or the Fed. There are millions of other actors who are seeking their best interest and working to achieve their own goals. These people have learned over the last century how to work around and within the government actions to minimize the consequences of those regulations and laws. Their ability to do so is not unlimited. But they have shown amazing creativity and resilience. We aren’t necessarily doomed.

Just as the government and mainstream economists don’t question their premises, those who have cried doom often in the last decades don’t seem to question why that doom hasn’t occurred. At root, they seem to give the government a kind of power in the economy that means that the non-government population is completely helpless and their actions have no consequences. Destruction is inevitable. Consequently, these doomsayers tend to pounce upon any small indication that things are coming apart as proof to the government’s power.

We must keep perspective.

The economy today is wallowing. The people making decisions are idiots. In many respects the average American cannot be relied upon to make good decisions. Even so, there is a lot of good stuff going on in our economy and society (including us). We can make it through with only a little damage. It would help if people listened to us. It would help if the American voters put in a non-Dem house of the legislature. Unfortunately, we can’t count on those events.

So what is the “Outlook”? At best it is very uncertain. Under current conditions and leaders, the best we can look forward to is more of what we have had over the last couple of years: no growth and floundering. With some positive results in November, maybe things will move toward the early part of this decade (not really good but better than now). But the potential is there for disaster. It isn’t unavoidable, just a potential.

Reich: From Regulation to Restructuring

In the second article by Dr. Robert Reich that caught my eye recently, the good doctor is actually criticizing BO and his gang. BO is not being assertive enough and thus the problems that both BO and Reich want to “solve” are not receiving the best solution, according to Reich.


First, Reich addresses the failures in the financial reform bill in Congress. He reiterates the criticisms that I mentioned in my last blog, i.e., that banks are being subsidized to cover their derivative activity (amazingly he includes the AIG transactions, which were actually straight insurance purchases).

But Reich’s primary criticism is that the banking system is not being “restructured”. Reich wants the major banks to be broken up and prohibited from reaching a (unspecified) size. (I wrote about that issue in a previous blog where I pointed out the very drastic consequences for the U.S. and world economy.) His reason is that he does not want them to be “too big to fail”, and thus be bailed out by the federal government if, rather, when things go bump again. Reich is not willing to consider the notion that maybe the government shouldn’t be bailing out banks or anyone. No, he thinks that part is fine. He thinks that the government is “protecting” the economy by bailing out people. Reich wants to break up the banks. I liken it to wanting to play tinker toys with real world businesses.

He does recognize that there may be adverse competitive consequences for U.S. banks, but he brushes those objections aside. This part of his argument is very strange. He says, “…since when is it up to taxpayers to guarantee profitability at America’s largest banks relative to foreign ones?” But, the Dems have never suggested that they wanted to undercut American businesses. Their claims before have always been that their “solutions” for the American economy have been beneficial to all. Reich is propounding a new attitude, a new policy that says that American businesses, and thus its citizens, should be “restructured” in spite of the obvious disadvantage that results.

To further make his case for restructuring, he turns to the healthcare industry. He says, “Similarly, the underlying system of private for-profit health insurance is a key driver of America’s bloated and ineffective health care delivery. We can try to regulate it like mad, but no amount of regulation will cure this fundamental problem.” Similarly, in this case, the problem is the “private for-profit health insurance”. Again, we need restructuring, i.e., a single payer system, socialized medicine.

Regulation for Reich is an attempt to “mend” capitalism. Instead, “The only way to have a lasting effect on industries as large and intransigent as banking and health care is to alter their structure.” And he further lets the cat out of the bag, “That was the approach taken to finance by Franklin D. Roosevelt in the 1930s, and by Lyndon Johnson to health care (Medicare) in the 1960s.” The former maintained a depression that lasted over a decade and LBJ can be thanked for the current mess in healthcare in the U.S., which no one, either Democrat or Republican, is willing to admit. So, all of the past attempts to deal with capitalism’s failings have themselves failed.

Reich’s criticism of regulation, especially in the two industries that he is using as his examples in the article, is that lobbyists and the industries can wiggle out of the intended consequences. He says, “A regulatory approach allows for more bargaining, not only in the legislative process but also, over time, in the rule-making process as legislation is put into effect. It’s always possible to placate an industry with a carefully-chosen loophole or vague legislative language that will allow the industry to continue to go on much as before.” That is, the victims can try to make some decisions of their own and try to run their own lives and businesses. He says, “And that’s precisely the problem.” The problem is that there is some semblance of freedom. That is unacceptable.

The problem in the American economy, according to Reich, is structural. What is the structure now, in Reich’s view. It is capitalism. It is for-profit. It is what the bankers are doing, basically by themselves, without Reich’s approval. The solution is for the government to mold the structure of the economy. Mold the activities of the people. Mold the people themselves.

As I said at the beginning of the first of these two posts, Dr. Robert Reich is a Marxist economist.

This article is unusual for two reasons. He explicitly proclaims that the actions of government should not be considered for their benefit for the economy or business but should be taken in the face of adverse consequences. He is admitting that the left’s solutions should be taken regardless of consequences. Instead, he calls for sacrifice (my word) for the benefit of the “taxpayers”. Second, his demands that the economy be restructured signal a new strategy. Regulation is now something that will be regarded as merely a accommodation to capitalism and rogue businessmen. What is needed is structural change, changes that make the government the direct controller in the economy. Regulation tends to be set up in terms of what business can’t do or what it must do to assure safety or fair play or some supposed good. Reich’s articles are pushing the government to become the primary force in determining the make up of businesses and the economy. Next, it will be the five year plan.

WE CANNOT IGNORE OBAMA’S ATTACK ON BANKS

For many very good reasons Objectivists and others became very active and vocal on the issue of health care. Destroying our health care industry, in this case by attacking the health care insurance industry, gives the government more power in fundamental ways and undercuts our ability to enjoy our lives, or actually stay alive. ObamaCare needed to be stopped. It needs to be reversed.
In very much the same ways, Obama’s attack on our economy will have the same effect. With an economy hindered, we will have less time and strength to fight for our freedoms, we will have more people dependent upon the government and thus reluctant to stand up to him. We will have more lawlessness. We will have a bigger fight to wage.
Central to a modern economy is the financial industry. We have seen how important a sick financial industry is and what the results can do to not just the U.S. economy, but to the world economy. At this time, Obama’s main target is the banks. He is threatening to hamstring them, shrink them and limit their size, and place even more controls on them than any sector of our economy has seen. He is encouraging the international community to do the same.

In a recent radio speech, Obama said, "Every day we don't act, the same system that led to bailouts remains in place, with the exact same loopholes and the exact same liabilities. And if we don't change what led to the crisis, we'll doom ourselves to repeat it. Opposing reform will leave taxpayers on the hook if a crisis like this ever happens again."

All of that is true, but it isn’t the loopholes and liabilities in the banks that create the problem, but the government. This story needs to be told and distributed. We need the Tea Party people to know this, we need the population to know this.

I see two parts to our problem. One, many people see the health care fight as a universal one in which everyone has a stake. They do not see the same for the attack on the bankers. This is a case where Obama is using the standard tactic of divide and conquer. Not only that, but many people who support the resistance to ObamaCare view the bankers as villains, or view regulation of banks to be a minor, separate issue that will have little effect on themselves. It is an ignorance of economics and of how business functions.

Second, Objectivists have no better understanding of economics and the importance of finance. Generally, our understanding of economics is little better than that of the man in the street, and for basically the same reasons. Further, most have not seen a reason for looking into economics. We understand the importance of knowing something about capitalism as a political system. We also understand the importance of business creativity, production, and markets. But we know little about how it all works and how the various parts will effect our daily life. We are thus vulnerable.

Expanded bank regulation, especially the attempt to shrink the banks needs to be opposed with significant effort. We need to make clear that our ability to have freedom and prosperity depends upon strong, market-driven banks. That government interference in banking is detrimental to everything we hold dear. We cannot let Obama have a unopposed path to destroying the economy.

What to do? The same things we have done already for healthcare. Plus, learn. Ask questions.

In a recent PJTV program discussing the mid-April Tea Parties, Dr. Yaron Brook said that this is the time to stand and work for freedom. This point in time is the best opportunity that he has seen. He also said that it might be our last chance, that is, if we fail now, it will be more difficult and perhaps impossible in the future. He means that in the future we will be too busy trying to stay alive and the forces opposing us would be armed and unwilling to let us speak. One vital key to our economic health and political freedom is the financial industry. We must try to save it.

PARALLELS, NASTY ONES

My perspective is economics, not that I am unaware of or concerned about the philosophic, moral, or political issues, but other people are writing about those and doing a fine job. I don’t see a reason for duplication. I don’t see much written about the economic implications and that is more where my experience and education lies, so, with that in mind, let me ask:



Do you notice the parallels between FDR and BO? Both began office after a huge dive in the economy: the stock market dove spectacularly in both cases, unemployment has soared to similar heights, there were financial crisis in both cases, both were preceded by Republicans who are regarded as somehow pro-capitalism but aren’t, both have pushed through public works bills, both pushed for overhauls of major parts of the economy, both are presenting themselves as saviors, and both are more concerned with power than any other issue. I am sure that there are more economic parallels.


Here we are into the second year of BO’s presidency, and, in spite of what the Fed and other government economists say, we are still in the recession. Unemployment is expected to remain high for years to come. Businesses and banks are unsure as to what to do because of the uncertainty as to what BO and his Congress will do to them in the near future. Further, what BO has done recently promises to weigh down the economy with massive expenses, higher federal debt, and tighter restrictions on production.


In other words, we have no good reason to think that our future will be any different now than the people in the 1930’s experienced. (It is true that BO has not started destroying food. Don’t put it past him.) To say this correctly, we are currently headed for continued recession that could last for years. Since BO, Treasury Secretary Geithner, and the Fed’s Bernanke do not know why the economy is not recovering, and would not consider freedom as an acceptable solution to the lack of recovery, we can expect more “solutions” that will sap our savings, and drive us further into recession/depression. Last time the Great Depression lasted 16 years without any questioning of the doctrine that kept us from prosperity. Even after the economy began working again, in 1946, when FDR was dead and Truman had put in his own people, no one questioned how the economy recovered without the government’s input. Today, no one is asking why the “recover” is so slow. Instead, they are doing everything possible to prevent recovery.


Further, after 70 or so years of encroachment by anti-capitalist measures, our economy has less vitality and room to maneuver than it did in the 30’s and 40’s. The government has more tools to manipulate and degrade economic performance today than it did before.


On the other hand, in some ways current businesses are more flexible and know more about their businesses than business managers in the 1930’s. Further, American businessmen have nearly a century of experience of how to work around government regulations and manipulation. That is not to say that they can bring our economy out of the recession, but they may be able to maintain their own and be modestly profitable. The large number of businesses dependent on government handouts will be a drag, as they continue to absorb savings and made-up money. It might sound as though this paragraph contradicts the previous one, but I am looking at the problem from first the restriction side and then the victim side. I don’t know which one will dominate, but both trends exist.


Frankly, what we have is uncertainty all around. But, keep in mind that uncertainty, in this circumstance, is a better condition than outright deterioration or a further dive.


In terms of your own situation, the best advice is to keep flexible. That doesn’t mean to stay in cash, including foreign cash, because cash is a guaranteed loss in a time period longer than a year. That doesn’t mean all gold, because the gold price, as we have seen over the last year, is bounced by many factors besides being a store of value. It doesn’t mean all foreign investments, because foreign economies are being buffeted by the same factors as the U.S. economy, including their own governments and central bankers. Foreign economies are also very dependent upon the U.S., so if we are failing, the likelihood of their flourishing is low.


What I think your best position includes is diversity, more so than ever, including foreign and domestic stocks, cash, foreign cash, and etf gold (least expensive way to hold it). No bonds of any kind. You do not want to be a lender in these circumstances.


Residential real estate is risky. If the situation is that your job could be in jeopardy, trying to hold on to the house could be a major problem. Buying today, even at low rates and lower prices is no guarantee that the purchase will work out for you in the next five years. If you have owned the house for some time and have equity in it, and the payments are relatively low, and you have some reserves, you are in a decent position. The biggest problem in these times is that the mortgage payment will tie you down, reduce your flexibility, and tend to present an inducement to remain in a perilous circumstance.


More than ever, you need knowledge. You need to know how these markets work. You need to know how the dollar relates to other currencies and foreign assets. You need to know how to watch your countries inflation monitors. You need to know what sources you can trust.


How long will this uncertain-stage last? It has lasted for several months so far, since the rush to dump employees slowed. We are waiting to see what effect BO’s massive new debt will have, we are waiting to see what the Fed does with all the money it created, we are waiting to see what consequences the new wave of regulations on all parts of the economy will have, we are waiting to see if BO can carry forward his massive expansion of government, and we are waiting to see if people are actually beginning to resist BO and the Dems. Combined, all of these issues are bad for even maintaining the current lull.


Prosperity is very unlikely if even a few of these economically stressful government activities come to fruition. I do not expect prosperity without at least some movement away from the future the present government and Congress have planned. Let’s say the Republicans win significantly in November. Will that mean that they will back us off of what BO will have instituted in his two years? It is unlikely. They may just decide that it is an opportunity for their brand of fascist state.


We could also see the economy begin a slow dive, not a panic, but just a decline as businesses find that they are not able to pay their debts or payrolls. This decline will not be signaled by any specific event. It could even be hid by the government’s statistical procedures. Just keep an eye out for a lack of growth, lack of non-government hiring, government talk of some segment or other of the economy failing to do their part, and the housing sector seeing more foreclosures and lower sales.


We may end up wishing we had a John Galt to unplug the minds keeping this thing alive.


Now, my focus is our economy. But as I said at the beginning of this post, I know that there is connection between the moral, political, and the economic, i.e., without freedom we cannot have a productive, prosperous economy. Without the morality of reason, of self-interest, we cannot have freedom. I am an advocate of individual rights and lazi-faire capitalism, of the virtue of selfishness.


I am talking to those whose fight is to achieve freedom. I merely want you to protect as much of your personal wealth and wiggle room as possible.