Traveling the Road to Poverty

March 22, 2011 06:50


There is a long-term inevitability to this economic crisis. It will end in financial collapse. Short-term ebb and flows in economic reports will continue. The media and ruling class will attempt to spin what they can as signs of a recovery. Others not advancing the meme will be ignored and disappear quickly.

From Monty Pelerin’s World

As the economic recession rolls on (it is, at a minimum, a recession heading for something much worse), government data and propaganda are geared to convey otherwise. Like a gambler down to his last stack of chips, government attempts to bluff its way through a losing hand. It will not work!

The act is growing old and people are disbelieving, eroding whatever credibility the government has left. Opinion surveys show historically low ratings for government and politicians. Rasmussen’s recent report is indicative that the economic message is not believed:

68% Believe U.S. Economy in Recession

The Rasmussen Consumer Index, which measures the economic confidence of consumers on a daily basis, slipped another half point today to 77.0. That’s up two points from a week ago, but down six from a month ago and down 16 from the highest mark of 2011.

There is a long-term inevitability to this economic crisis. It will end in financial collapse. Short-term ebb and flows in economic reports will continue. The media and ruling class will attempt to spin what they can as signs of a recovery. Others not advancing the meme will be ignored and disappear quickly.

Regardless, our destination now is likely unchangeable given the political cowardice amongst the ruling elite. A concise summary of where we are headed has been provided by John Rubino:

  • Food stamp usage is soaring while governors are just proposing big cuts in aid to cities and mass layoffs of public employees. Once these cuts kick in, expect to see even higher levels of dependency.
  • We aren’t nearly as rich as we thought we were, obviously. Which isn’t a surprise to anyone fixated on the rising debt levels of the past few decades. We’ve had to borrow to maintain an illusory lifestyle, and now the money is gone.
  • Living standards will have to fall to a level not just consistent with our current income, but with our income minus debt service. The transit story is a good example: more people are riding buses and subways because they can’t afford to drive. But the president’s attempt to double funding for mass transit is pure fantasy. Federal spending on this and most other things will fall, not rise, in the coming decade, so the quality of buses and subways will deteriorate as ridership continues to increase. Meanwhile, pensions will shrink and entry level public sector jobs will pay less and less. We’re becoming a Third World country, with no one to blame but ourselves.

Current trends, in hindsight, can be tracked back to the mid-1970s. Arguably the trends started before that, although were not apparent in aggregate data.

In one of the more definitive graphics on this topic, John Lohman focused on just the last ten years:

Each graphic cell shows severe and generally accelerating deterioration over the last decade. It appears as though we are nearing some type of end game, likely an economic tragedy greater than any before it.

Mr. Lohman’s thesis is that government’s attempts to manage the business cycle over the last 100 years have made matters worse and hollowed out the economy via debt saturation. We are near the point of collapse as the level of debt is no longer serviceable.

Keynesian economics provided both the rationale, justification and tools to achieve this condition. Politicians accepted Keynes like an alcoholic accepts another drink. They were only too happy to have cover for buying votes and extending the party.

Unfortunately, this kind of economics and politics has a limited lifespan. Distortions are produced which create imbalances in the economy. More money is necessary to sustain the high. In order to succeed the skullduggery must be continued but at an ever accelerating pace. At some point, the system becomes unsustainable and so corrupted that it collapses.

As expressed by Mr. Lohman:

Alas, one hundred years of the government’s attempts to mute the natural business cycle are slowly and painfully coming to an end.  A period where the government proactively encouraged consumption until it became 70% of the economy, we produced very little, and our savings rate reached zero.  A period where home ownership was promoted as the ultimate supreme goal until the last citizen that could fog a mirror yet was least able to afford it was suckered in.  As this leveraged consumption pyramid is finally ending, the government and central bank have embarked on one final mission to prop it up using the same tools that got us here in the first place: more leverage.  Only this time on a logarithmic scale.  Unfortunately, the scale is so large that it will not only guarantee an endgame, but it will accelerate it.  The visual below contains a few pieces of evidence that seem to confirm this, namely that over a ten year period: the consumer is stuck with an underwater balance sheet and the Fed’s attempt to create yet another bubble is only making it worse; outside of government efforts, the economy is unable to generate  sustainable job growth; and finally, the leverage scheme is so large that it no longer has a positive impact on growth (“debt saturation”).



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