Monday, July 12, 2010

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Economic Doom

bad-economy analysis by Reb Akiva at Mystical Paths

(Excerpted) Most Americans are too busy or distracted to realize the world economy now sits on an unprecedented abyss…

What happened to America is that its Gross Domestic Product (GDP), the measure of the nation’s overall economic output, declined by –2.5% (real or inflation-adjusted GDP) in 2009…

As Seattle Times reporter John Talton says it: "The Federal government used its firepower to rescue the financial system… Now ‘austerity’ and the deficit are the big memes in the other Washington. It was politically impossible even to extend jobless benefits…. For decades the American job machine was the envy of the world. Now something is very wrong, and it defies easy talk-radio ideological name calling."

ventura062207 Putting true numbers to the economic crisis is difficult because the government issues more flattering numbers than what the real America experiences. The Bureau of Labor Statistics says unemployment is around 15 million, or 9.7% of the workforce, but in reality, government numbers only reflect the short time period when people have recently been laid off of work and are seeking jobs or applying for unemployment.  True unemployment is around 21.7% (near depression-era rate) according to Shadowstats.com. Furthermore, the M3 money supply reported for June 15, 2010 shows a negative 5.91% drop, the steepest decline in the M3 since the 1930s banking crisis. (The M3 is the broadest measure of money. It includes currency, checking and savings accounts, large time deposits, institutional money market mutual fund balances.)

The Federal government keeps saying America will grow itself out of its debt load and unemployment problems, so in the 1st Quarter of 2010 the bailed-out economy reportedly grew by a reported 2.7%, but as results of 2nd Quarter approach, doubts over continued growth are beginning to creep in…

(Read the whole thing.)

While the article (by Bill Sardi at LewRockwell.com) is equivocal (titled “Is the Bailout going to work?”) and the quote by the reporter is vague (“something is very wrong”), honestly it’s not that difficult in straight analysis to understand.  The key is the last paragraph that I excerpted, “The Federal Government keeps saying America will grow itself out of it’s debt load and unemployment problems”.

This is a classic Keynesian approach to economic downswings.  Deficit spend to nudge the cycle back up before it bottoms out and suffers the worst aspects, and the deficit will be made up as the economy recovers.  However, success at this method is dependent of a few important factors.  First, the conditions at the start of the downward cycle and the upward swing remain similar – meaning the economic engines of growth remain available to ‘switch back on’.  Second, the debt load of the government at the beginning of the down swing should be at it’s lowest level (since times have been good, previous debts should have been repaid and even some “rainy day savings” set aside) – so the deficit spending doesn’t draw too much money out of the economy.

The US has two serious serious problems relative to a Keynesian recovery:

Goldmine_cartoon A – The primary economic engines of the previous 15 years have been TERMINATED.  Easy financing, venture capital, hedge funding, (generally) light regulations and very limited free market controls, all these allowed an explosion of business opportunities and the means to take advantage of them. 

A simple example.  When I was a child I used to fly across country to visit my grandparents.  The price of a cross-country ticket was $700 (in the 1970’s), the available schedule was a few flights a day, the available airlines were three.  The United States had 5 airlines that covered the country, and entry into the business was impossible with the level of regulation.  No matter what ideas you may have had for more efficient, cheaper, or more customer oriented airline travel – there was no way to enter the market with under $1 billion of investment, an impossible amount to achieve. 

When the airline business was de-regulated (no longer controlled practically as a public utility), tens of airlines started, cost of travel fell massively, airline travel exploded as did the associated jobs in the industry.  The original reason for the regulation, safety, didn’t fall as the regulation refocused on only safety factors and not controlling the market.

A very similar story occurred with the Bell Telephone Company, which was subsequently de-regulated and split into regional companies.  The proliferation of telecommunication companies, options, technologies and jobs was explosive.

The current administration has returned to a massive re-regulation mode.  Food companies will be regulated due to the public health danger of fat.  Every company may be regulated due to carbon release and environmental impact.  Health care companies will be regulated and controlled to manage the product delivered to governmental standard.  Insurance companies will be regulated to provide their product at government mandated prices.  And every company will be regulated on what benefits (in health care to start) it can provide it’s employees, and what benefits (bonuses or stock options) it can’t provide it’s employees.

Every regulation raises the cost of entry, reduces the flexibility with which a company can operate, stops agility in reacting to the market or competitors, and stifles innovation.  When those things combine, the ability to enter the market is closed or too expensive for start-up competitors.

money B – The US entered the current downturn with a heavy debt load.  Both the federal government as well as state and local governments got so used to the extended upswing that they upscaled government services and spending beyond the ability of the tax and economic base to handle it at the height of the upswing – and therefore continued to increase the debt load in the midst of the upswing.

When the downturn started, all levels of government were only getting by with low borrowing costs of the easy money time.

As the economy fell, tax rates crashed and the government (at all levels) had to massively increase borrowing to maintain existing service levels.  Even 2 years into the economic crisis, few governments at any level have truly scaled back to meet their current tax bases.  In some cases this is due to politicians unwilling to effectively take the necessary actions but get themselves thrown out of office for doing so (nobody likes to lose their benefits), in other cases due to ridiculous laws or regulations that basically ‘legally’ prevent governments from actually reducing benefits / pensions / or laying off employees.

Net net, add existing government borrowing on top of massive debt load increases due to the Keynesian spending for downturn recovery and you have the government (at all levels) absorbing all available investment dollars.  Why risk loaning to start-up businesses when loaning to the government provides “guaranteed” returns?

So the government admits it’s strategy is to “grow itself out of the downturn”, but the engines of growth – innovation, start-up businesses, business agility, have been squashed.  And the financial structures necessary to support business growth have also been squashed.

Of course, the alternative program is for the government to fund the operational economy, take over businesses, run sectors of the economy, and put all the people into jobs programs.  Besides the fact that doesn’t work out so well (check Venezuela or Cuba for how that goes), the government literally doesn’t have enough money left to do so!

Given the strong ideological commitment of the Obama administration to it’s current approach, I’d say the best the U.S. can hope for is stagnation at the current level until the end of this administration.

8 comments:

neshama said...

Excellent! Kol HaKavod.

This is happening slowly so that the American Jews can wake-up, pack-up, and fly-Home! It's remarkable to witness a Galus disintegrating before your eyes.

And, of course, this means that the desert is going to blossom and bloom and become the breadbasket of the world; they will line up to pay their respects to our Holy Temple and the Kohen Gadol.

Crazy Smade said...

And while the Jews wake up and fly home, the Noachides will be left behind. Great.... :(

Shiloh said...

Neshama, now Jews, if lucky enough will be flying out with their pajamas on. Since the little equity they had will soon evaporate because of the next downturn. Rabbi Amnon Yitzchak just did a video on his website (in hebrew) explaining how the Nations will expell the remaining Jews, but they won't be allowed to fly. I agree with him and I don't think it's far off now.

I don't know how much time will be left, but as in the Shoah, galut Rabbi's for the most part are silent (possibly they don't see it coming). Too many are tied to big mortgages or ones with negative equity. Lack of parnassa prospects etc. But will it be life or death.

Dan Schwarz said...

If you're going to choose an industry that was helped by deregulation, the airline industry is probably not the one you want to go with. I also remember the $700 airline flights (with attentive, friendly service!). Deregulation has brought lower prices, but also huge instability in the airline industry. The giants of the airline industry - TWA, Pan Am, are gone. Today's large carriers like United and American only survive due to a $18.6 Billion bailout undertaken by the Bush administration in 2001. Even now they exist one oil price spike away from bankruptcy. The smaller carriers like Southwest are in relatively better shape, but they only serve a fraction of the market.

Fatzapper said...

Excellent article. Thanks Rabbi. When ever, I speak about this in United States, I am accused as fear mongering. Now, what is the difference between fear mongering and saying the truth. I just want to wake people up and perhaps save their life.

Shiloh said...

Its just not the US. I went to the bank today to transfer funds to my account in Israel. The bank clerk who happened to have a name of middle eastern origin did the paperwork, and then told me that they have to hold it. Suspicious of that, I got on the phone to the main branch and advised them that their employee was playing games because of sending a wire to Israel and I want to speak to someone high up in the bank. As soon as I mentioned Israel, the lady on the phone said one moment, came back and said it was corrected (I was online with my account while this went on). So we will see. This is not the first time this has occured. I have had some of middle east origin refuse to provide banking services to me when it has to do with Israel. Even when they see my name, they play games. This is only the beginning of what's to come people. We better wake up quickly.

Fatzapper said...

I am seriously considering leaving US for Israel? I am just worried that I will have a hard time fitting in. Further, finding a job will be quite difficult for me being that I find Israeli's much smarter in computer science then me.

Shiloh said...

Fatzapper, leave and don't look back. You will arrive, it will be tough to adjust. Lifestyle, midot, etc. It's going to take time to find your place. But it's home, no place like it for a Jew. Go as a child, looking up to his Father for help. It will be there. You have to do your part, sell what you are not taking, call Nefesh B Nefesh or your local Jewish Agency.

If you understand Hebrew, check out Rabbi Amnon Yitzchak. I think he has some stuff in English. He may open your eyes to what's happening behind the mystical scene. Time is almost up for galut Jews. That is a promise. Think about it real hard and ask haShem for help. It's there waiting for you to make the move.

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