T Nation

Economy: Rudderless and Reeling

US Economy: Rudderless and Reeling From Direct Hits
A raid on private pensions?

By Paul Craig Roberts

16/09/08 “ICH” – - We were promised a �??New Economy�?? of high-tech tradable services to take the place of the offshore manufacturing economy. Wondering what had become of the �??New Economy,�?? Duke University�??s Offshoring Research Network searched for it and located it offshore. Yes, the activities of the �??New Economy�?? are also outsourced offshore.

Call centers, IT operations, back-office operations, and manufacturing have long been moved offshore. Now high-value-added proprietary activities such as research and development, engineering, product development, and analytical services are being sent offshore. All that�??s left is finance, and it is crumbling before our eyes.

Independent broker-dealers are disappearing: Merrill Lynch, Bear Stearns, Lehman Brothers. These venerable institutions were too thinly capitalized for the risks that they took. Merrill Lynch is now part of the Bank of America, and Lehman Brothers is history.

Ill-advised financial deregulation led to financial concentration and not to more efficient markets. Independent local banks, which focused on financing local businesses, and Saving and Loan Associations, which knew the local housing market, have been replaced with large institutions that package unanalyzed risks and sell them worldwide.

Regulation over-reached. The pendulum swung. Deregulation became an ideology and a facilitator of greed.

Deregulating electric power gave us Enron.

Deregulating the airlines destroyed famous American brand names such as Pan Am, shrank the number of companies, and caused a decline in service. When airlines were regulated, they could afford standby equipment, and cancelled flights were rare. Today, the bottom line prohibits standby equipment, and mechanical problems result in cancelled flights. When economists calculated the benefits of deregulation, they left out many of its costs.

There are no longer any blue chip companies, which means that investing for retirement has become a crapshoot. People realize this; thus, the privatization of Social Security has no support.

If we look realistically at the US economy, we see that what is not moved offshore is being bailed out. Last year, the US Department of Energy was authorized to make $25 billion in loans to auto manufacturing firms and suppliers of automotive parts. Last week the Secretary of the Treasury took $5 trillion dollars in Fannie Mae and Freddie Mac home mortgages under its wing.
The Congressional Budget Office says this action by the Treasury means �??that the operations of Fannie Mae and Freddie Mac should be directly incorporated into the federal budget.�?? http://cboblog.cbo.gov/ Their revenues would be treated as federal revenues, and their expenditures as federal expenditures. If the former were greater than the latter, there would be no reason for the takeover.

The open question is: what do these new liabilities do to the Treasury�??s own credit standing?

For now, this question is submerged. The traditional practice of fleeing to the US dollar and US Treasury bonds during periods of financial stress and uncertainty has boosted the dollar and kept interest rates low. But sooner or later the large US budget deficit, worsened by recession and bailouts, and the large trade deficit, which requires constant recycling of dollars held by foreigners into US financial and real assets, will result in renewed effort on the part of foreigners to lighten their dollar holdings.

When this time arrives, US interest rates will have to rise in order for the government to be able to continue to rely on foreigners to recycle the dollars acquired in trade to finance the US government�??s annual budget deficit.

The current financial problems have pushed into the background the larger problems of the US budget and trade deficits. Goods and services for American markets that US corporations outsource offshore return as imports, which widen the US trade deficit. Moving production offshore reduces US GDP and employment and increases foreign GDP and employment. Moving production offshore reduces the export capacity of the US economy while raising the import bill.

Therefore, how is the trade deficit to be closed? One way is through the dollar�??s loss in exchange value, which would reduce American consumers�?? real incomes and leave them too poor to purchase the offshore goods and services.

How is the budget deficit to be closed when jobs are disappearing and GDP (tax base) is being relocated offshore?

Not by higher taxes. Higher taxes are problematic for a recessionary economy in which unemployment, properly measured, is already in double digits ( www.shadowstats.com ).

Some people have speculated that the budget deficit will be closed by dismantling entitlement programs such as Medicare. However, considering the cost of medical insurance, this would be catastrophic for tens of millions of older Americans.

The more likely avenue will be a raid on private pensions. The Clinton administration�??s appointee, Alicia Munnell, as Assistant Secretary of the Treasury for Economic Policy argued that private pensions should face a capital levy to make up for the fact that their accumulation was tax free. I expect that the federal government, faced with its own bankruptcy, will resurrect this argument, as it will be preferable to printing money like a banana republic or Weimar Germany.

In the 21st century, the US economy has been kept going by debt expansion, not by real income growth. Economists have hyped US productivity growth, but there is no sign that increased productivity has raised family incomes, an indication that there is a problem with the productivity statistics. With consumers overloaded with debt and the value of their most important asset–housing–falling, the American consumer will not be leading a recovery.

A country that had intelligent leaders would recognize its dire straits, stop its gratuitous wars, and slash its massive military budget, which exceeds that of the rest of the world combined. But a country whose foreign policy goal is world hegemony will continue on the path to destruction until the rest of the world ceases to finance its existence.

Most Americans, including the presidential candidates and the media, are unaware that the US government today, now at this minute, is unable to finance its day to operations and must rely on foreigners to purchase its bonds. The government pays the interest to foreigners by selling more bonds, and when the bonds come due, the government redeems the bonds by selling new bonds. The day the foreigners do not buy is the day the American people and their government are brought to reality.

This is not the financial position of a superpower.

Will what happened to Lehman Brothers today be America�??s fate tomorrow?

And the answer remains that unless people do largely the right thing because they give a shit about somebody other than themselves and it’s the right thing to do, we wind up with enormous destructive power in the hands of either ruthless corporations or an even more ruthless government.

This is not freedom.

[quote]Tiribulus wrote:
And the answer remains that unless people do largely the right thing because they give a shit about somebody other than themselves and it’s the right thing to do, we wind up with enormous destructive power in the hands of either ruthless corporations or an even more ruthless government.

This is not freedom.[/quote]

It was the whole idea of not thinking of ourselves that led to all this. We wanted to save Europe from the Nazis and then the Communists. We wanted to keep old people out of poverty. We wanted to educate and empower people living in hellish ghettos. On and on…

I fear that all we did was bankrupt ourselves.

Hard as it is to accept, being unselfish leads (in general) to disaster. It creates monster governments hellbent on spending countries into destitution. It is satanism at its finest, because Satan wants us to destroy ourselves. We do, all in the name of morality. How ironic is that?

[quote]AynRandLuvr wrote:
Tiribulus wrote:
And the answer remains that unless people do largely the right thing because they give a shit about somebody other than themselves and it’s the right thing to do, we wind up with enormous destructive power in the hands of either ruthless corporations or an even more ruthless government.

This is not freedom.

It was the whole idea of not thinking of ourselves that led to all this. We wanted to save Europe from the Nazis and then the Communists. We wanted to keep old people out of poverty. We wanted to educate and empower people living in hellish ghettos. On and on…

I fear that all we did was bankrupt ourselves.

Hard as it is to accept, being unselfish leads (in general) to disaster. It creates monster governments hellbent on spending countries into destitution. It is satanism at its finest, because Satan wants us to destroy ourselves. We do, all in the name of morality. How ironic is that?

[/quote]

OK, were gonna disagree on a couple levels here.

Our operations overseas were for the purposes of keeping the conflicts away from our shores in the case of WWII. Conflicts like Korea and Vietnam along with some “smaller” ones were fought to deny Soviet communism the additional resources that would be gained from the successful exportation of their ideology and thus, again for our security here. The benefits to the direct subjects were secondary considerations regardless of what was publicly reported.

Being “unselfish” IS disastrous if that unselfishness is manifested through government using other people’s money. I’ve said here before that the genius of our founding fathers was the creation of a government and by extension an economy where somebody doing what’s best for them and theirs is also good for everybody else.

However when the auto industry and tech industries for instance ship the livelihoods of our citizens to other countries in the name of making more money for the few, the result is Michigan being an economic wasteland with almost an almost 9% unemployment rate. Of course that’s not the only reason, but it is a major contributor.

When these financial INSTITUTIONS, they’re not even companies any more, engineer their operations so that the honchos rake in astronomical incomes with no thought of what it will do to anybody else that is an abuse of the free market.

Government oversight is not the answer. In fact that cure will be worse than the disease. People caring about their country and the others who’s money they’ve been entrusted with even if they don’t personally make as much is. In other words there is no answer because exactly the opposite is the order of the day.

It is true that what begins as an altruistic enterprise, like the new deal, ALWAYS ends up a colossal black hole of public resources with little to show in the long run. However, that is exactly because of the selfish pursuit of power that results from public dependency, not because of any altruistic propensity on the part of the agents charged with dispensing that altruism.

Before you hit me with “yeah but it’s the altruistic public that elects them that’s the problem” let me point out that EVERYBODY who votes for these big government Robin Hoods also does everything possible to avoid paying the taxes they voted for. It’s other people they think should really pay for all this.

In short, selfISHness is the driving force of human nature. All anybody needs to do to prove that to themselves is to watch a room full of kids. GIMME GIMME GIMME, MINE MINE MINE, ME ME ME. They’ll beat each other senseless over a toy.

Even what purports to be selfless altruism is still done for selfish purposes in the end.

Who thinks the economy is really this bad?

“Deregulation”? That’s the big bad enemy? Sorry, but if anything, the reason banks are dropping like flies, it’s because congress FORCED the banking industry to lower their standards. The banks weren’t giving loans to enough poor people or minorities, so congress was just SUPER OFFENDED and had to step in and “make things better”. If congress had gotten out of the damn way, we (probably) wouldn’t be in this mess. This is another example of what happens when we lower our expectations.

And for Nominal, I think the economy might actually be WORSE than we think. The collapse of banks and mortgage lenders is just a microcosm of the entire economic situation for millions of families in the US. We have more debt than we can pay. We have borrowed more than we should. That is true for individuals, businesses, and the US Government itself. We’re all broke, and we keep putting off paying what we owe, and that debt continues growing and accruing interest. I don’t see it getting better. I KNOW we can’t tax our way to economic freedom, and nobody in the country has the balls to cut spending. We’re pretty much screwed.

In the long run, yes.

In an academic sense, I agree with you. But I’m interested in knowing if anyone is really suffering right now.

I’m in the service industry as a personal trainer, and I can’t say that I’ve felt the impact. You would expect that amenities such as personal training would be the first things to go when people tighten their budgets, but I haven’t seen any slow down.

All around Boston, new facilities are being built and current places are hiring. In my area, they keep opening new spa and massage places. So where is the crunch?

The only thing I have noticed is the price of groceries going up over the past few years. For instance, Trader Joe’s is a lot more expensive around here than it was in the late 90’s. But that is hardly a reason to panic.

[quote]Nominal Prospect wrote:
I’m in the service industry as a personal trainer, and I can’t say that I’ve felt the impact. You would expect that amenities such as personal training would be the first things to go when people tighten their budgets, but I haven’t seen any slow down.
[/quote]

Well that depends on who your clients are doesn’t it? How many clients do you have who have had their homes foreclosed upon? How many of your clients have lost a job?

I can tell you if I had to worry about money the first thing I would cut out is movie tickets, junk food and Friday evening pub crawls. But those are my own personal values. Your clients may have the same values too.

[quote]LIFTICVSMAXIMVS wrote:
Nominal Prospect wrote:
I’m in the service industry as a personal trainer, and I can’t say that I’ve felt the impact. You would expect that amenities such as personal training would be the first things to go when people tighten their budgets, but I haven’t seen any slow down.

Well that depends on who your clients are doesn’t it? How many clients do you have who have had their homes foreclosed upon? How many of your clients have lost a job?

I can tell you if I had to worry about money the first thing I would cut out is movie tickets, junk food and Friday evening pub crawls. But those are my own personal values. Your clients may have the same values too. [/quote]

Why would you cut out junk food? It’s cheaper than health food, that’s for sure. Ever been to Whole Foods?

[quote]Nominal Prospect wrote:
Why would you cut out junk food? It’s cheaper than health food, that’s for sure. Ever been to Whole Foods?[/quote]

Whole Foods is where we do the majority of our shopping because it is close; junk food is especially expensive there.

I guess I just think of junk food as the “goodies” like cakes, cookies, and cola. I get what you’re saying though. I do not like to contemplate the possibility I might have to eat something out of a box again.

[quote]Tiribulus wrote:
AynRandLuvr wrote:
Tiribulus wrote:
And the answer remains that unless people do largely the right thing because they give a shit about somebody other than themselves and it’s the right thing to do, we wind up with enormous destructive power in the hands of either ruthless corporations or an even more ruthless government.

This is not freedom.

It was the whole idea of not thinking of ourselves that led to all this. We wanted to save Europe from the Nazis and then the Communists. We wanted to keep old people out of poverty. We wanted to educate and empower people living in hellish ghettos. On and on…

I fear that all we did was bankrupt ourselves.

Hard as it is to accept, being unselfish leads (in general) to disaster. It creates monster governments hellbent on spending countries into destitution. It is satanism at its finest, because Satan wants us to destroy ourselves. We do, all in the name of morality. How ironic is that?

OK, were gonna disagree on a couple levels here.

Our operations overseas were for the purposes of keeping the conflicts away from our shores in the case of WWII. Conflicts like Korea and Vietnam along with some “smaller” ones were fought to deny Soviet communism the additional resources that would be gained from the successful exportation of their ideology and thus, again for our security here. The benefits to the direct subjects were secondary considerations regardless of what was publicly reported.

Being “unselfish” IS disastrous if that unselfishness is manifested through government using other people’s money. I’ve said here before that the genius of our founding fathers was the creation of a government and by extension an economy where somebody doing what’s best for them and theirs is also good for everybody else.

However when the auto industry and tech industries for instance ship the livelihoods of our citizens to other countries in the name of making more money for the few, the result is Michigan being an economic wasteland with almost an almost 9% unemployment rate. Of course that’s not the only reason, but it is a major contributor.

When these financial INSTITUTIONS, they’re not even companies any more, engineer their operations so that the honchos rake in astronomical incomes with no thought of what it will do to anybody else that is an abuse of the free market.

Government oversight is not the answer. In fact that cure will be worse than the disease. People caring about their country and the others who’s money they’ve been entrusted with even if they don’t personally make as much is. In other words there is no answer because exactly the opposite is the order of the day.

It is true that what begins as an altruistic enterprise, like the new deal, ALWAYS ends up a colossal black hole of public resources with little to show in the long run. However, that is exactly because of the selfish pursuit of power that results from public dependency, not because of any altruistic propensity on the part of the agents charged with dispensing that altruism.

Before you hit me with “yeah but it’s the altruistic public that elects them that’s the problem” let me point out that EVERYBODY who votes for these big government Robin Hoods also does everything possible to avoid paying the taxes they voted for. It’s other people they think should really pay for all this.

In short, selfISHness is the driving force of human nature. All anybody needs to do to prove that to themselves is to watch a room full of kids. GIMME GIMME GIMME, MINE MINE MINE, ME ME ME. They’ll beat each other senseless over a toy.

Even what purports to be selfless altruism is still done for selfish purposes in the end.[/quote]

Nice post and food for thought. Thank you.

I guess my view is that people are naturally selfish and that getting them to act otherwise requires a big government willing to use force. That big government requires cash and we get today’s mess.

And yes, I agree that the absolute kind of total unselfishness probably doesn’t exist.

[quote]Nominal Prospect wrote:
Who thinks the economy is really this bad?[/quote]

A lot depends on where you live. Michigan is really bad and northeast Indiana where I live is pretty terrible, because of the auto industry.