oftwominds-Charles Hugh Smith

Trends for 2009: "Same Old, Same Old:" Borrow and Spend, Until We Can't


The Federal government and financial system of the U.S. will continue applying the same old "borrow and spend" tricks to reinflate the debt bubble/bogus "prosperity" economy until such time as interest rates rise enough to stifle borrowing. The end-game of that worldview is now in sight.

As noted in Leverage Points for Positive Change (October 17, 2008), noodling around the edges of problems never solves them. We are currently engaged in a multi-year noodling effort known as "borrow and spend, then borrow and spend some more. Repeat until debt bubble reinflates or nobody lends us any more money."

The absurdity of attempting to force people to borrow beyond their means is self-evident to all but those who are yanking furiously on the levers of government policy.

In my little book Weblogs & New Media: Marketing in Crisis I list three sources of leverage in any system:

1. Add an information feedback loop

2. Change a goal

3. Change a worldview

People saving instead of borrowing more is certainly a new "informational" feedback loop in the system, as well as a new goal. The worldview that the U.S. economy can magically return to the glories of debt-fueled "prosperity" circa 2006 has yet to be replaced with a more realistic worldview.

Such a view would recognize the impossibility of borrowing trillions of dollars to support spending, the impossibility of reinflating the debt/asset bubble with legerdemain and a "zero interest rate" policy, and the impossibility of re-energizing a global system based on stupendous leverage and astounding velocity of transactions and money.

Frequent contributor Harun I. addresses the end-game we face:

"The responses to your post were thoughtful. I agree with some of the main points but remain unconvinced of the solutions.
Our problems began in 1913 when the Fed and therefore de facto centralized planning was established. And every generation that ignored the fact that counterfeiting money and lending it at interest is a scheme that has catastrophically failed in all previous attempts deserves what eventually befalls them -- results equal intentions.

The problem with maintaining inflation at 3% is that it compounds until the curve approaches vertical. This exponential growth will eventually outpace real productivity and therefore, at some point, fake prosperity has to be created through expansion of fiduciary media (credit). What this implies is that what is happening today could have been and probably was predicted well before 1913. But once again politics trumped reason.

The effects being experienced today had to materialize. Mathematically there is and can be no other outcome. Ceteris paribus, as real productive activity decreased, credit (fiduciary media) had to be expanded at exponentially increasing rates until exhaustion. Exhaustion occurs at the point where the curve approaches vertical where infinite credit or money has to be injected infinitely. This is impossible and is why all efforts thus far have failed.

Mish is absolutely correct when he observes that credit is being destroyed faster than it can be created.

Those demanding that you tender solutions do not understand that: 1) The 53 trillion dollar gorilla in the room cannot be satisfied. What is so egregious is that the Boomer generation saw or should have seen it coming. Instead of tackling a very difficult problem they chose distraction by bread and circuses.

That the most technologically advanced country in history could conceive that sending worthless pieces of paper to China so that they could buy worthless Treasuries so that we could continue to purchase "things" that required real human effort and natural resources is either collective insanity, rank stupidity, desperation, or just plain old greed.

And now that we have engaged in this type of activity for decades and the comeuppance is upon us we demand solutions to avoid the inevitable consequences of ineptitude and apathy.

Means testing will cost billions we do not have, will be implemented ineffectively, and, on scale, will prove ineffective at deflecting the 53 trillion dollar asteroid the size of Rhode Island hurtling at us at a few hundred-thousand miles per second.

The situation is untenable. That an insolvent government (starting from a 53 trillion dollar deficit) and facing global peak resource utilization, will somehow effectively manage to administer to a huge retired population whom have no savings, assets that they will only be able to sell at a loss and pensions denominated in a worthless currency, as a line of thought, is at best, imprudent. I take no pleasure in stating, and do so without any hyperbole, that you are about to forget about Katrina.

2) This Grand Cycle top is unlike any other faced by mankind. We are at peak everything; peak oil; peak food; peak water; peak industrialism; peak credit; but not peak population. There is and will be no excess capacity for growth. The very mechanisms that have allowed homo sapiens to reach such high levels of population density are at or near exhaustion.

And there is no Plan B. Those depending on technology to the rescue do not understand that by the time the Trident Submarine was put into production its design was 20 years old -- and obsolete. This type of government performance is not encouraging. Very long term there will be no return to what has become to be known by the Boomer and current generation as status quo.

What will have to happen is a return to using precious resources not for consumerism with all of its built in waste (planned obsolescence, disposable everything) but for producing absolute necessities.

This may all sound grim but if you remove the adjective, it simply is.

I have not read Mr. Kunstler's book but the title cuts to the heart of the matter -- we have entered a long emergency."

Eric A., who recently penned the nuanced essay Life and Cash-flow Accounting , added these thoughts on what constitutes wealth in a new paradigm:

"There’s a far more likely possibility than any government-ordained financial triage: it’s that you and your extended family will move back to one house, grow their own food, and hustle whatever they can on the side. …Just like every other time in the history of mankind except the peculiar decades of 1947-2007.

The government can ration all they want. They can demand doctors give care all they want. They can give away all the money they want. But that won’t actually make things happen. Today’s case in point is Zimbabwe, but history is littered with examples. In the mid-80s the Zimbabwe dollar was par with the USD. Today $100Billion buys 3 eggs(actually $100 Trillion—it’s been revalued once already). The National Statistian officially stopped calculating inflation because goods are no longer for sale. How do you calculate a basket when nothing is available at any price?

This sounds far-fetched to us Americans, but with $99,000 Billion in unfunded liabilities, now rising at $8,000 Billion—or $23,000 a person--per year, why would we expect the money the government gives us will be of any use? In reality, the government is incapable of giving us anything we didn’t already make.

The only thing they can do is re-distribute from people who produce things to people who don’t. And when they do, I foresee a steady rise among those who receive and a steady decline among those who produce culminating in long-term shortages and general poverty—just as seen in Zimbabwe’s identical experiment. (For more, see Zimbabwe’s letter of approval for the Fed’s recent actions)

But note that neither unlimited sums of money nor the reality of a violent dictatorship can cause goods to appear, in Zimbabwe or anywhere else.. Only hard work and free cooperation can. This will happen the minute government stops actively preventing it, although you are free to do so now if you choose.

I did this with hyperinflation as an example, but the same would occur in a Depression: in the last Depression, government funded work programs, raised wages, demanded compliance to dozens of schemes, and deficit spent. It made no difference then either: there were shortages and general poverty.

This is because money is not wealth but a way to measure cooperation. Introducing money in the “rationing” argument is a misleading calculation. Is it better to have $20/mo owning your house and making your own food with 5 or 10 others to fall back on, or get a check for $2000/mo when you live alone, rent, and buy everything? In this case you might have a better life and better peace of mind being dismally “poor” than being “rich”. Doubly so when the government has more than shown that they are incapable of helping, of keeping their word, or of having your interests in mind.

I fully expect them to give away lots of money, demand cooperation by means both just and unjust, re-distribute goods with reckless abandon, often to themselves, waste goods, bark lots of orders, and I expect it to do no good whatsoever. Even financial triage and rationing of services is a sideshow.. With hard work and cooperation, there would be no need for rationing at all. As in the example of Zimbabwe, this happens automatically in a sound monetary system.

If for lack of alternatives each family or group becomes self-supporting with their family homes and dooryard gardens, what need would there be to re-distribute goods to others who are equally self-sufficient? And if we stop the massive re-distribution, what would we need the re-distributors for? The government has become nearly 50% of the economy. Returning their share to ourselves would be an enormous boost, perhaps enough to offset poverty.

Maybe we should stop looking to get everything from somebody else, cut out the re-distributors, and divide their share among ourselves. Ya think?"

Noah C.'s comments in Trends for 2009: Generational Optimism (January 5, 2009) about his generational peers seeking government jobs drew numerous responses, and here are Noah's thoughts on the issues raised.

"I was merely describing what we are doing, what I am seeing. I know many people my age who grew up very poor but still are working and have worked to become things like electricians, plumbers, brick layers, truck drivers, and nurses. I do not know many people from the upper class who work in business or are lawyers because the field of writing doesn't lead me to those people. It leads me to liberals who read a lot. I was describing, not proscribing, what my generation is doing with their time who are graduating with bacholors and masters degrees who grew up in the middle class.

What will be the result is unpredictable.

With fossil fuel depletion and 78 million Americans becoming retired and useless to the functioning of society in less than 10 years. I don't know what the results will be. But I don't know anybody talking about giving up.

We have to look back at the baby boomers when they were young. How the older generation was telling them that women and blacks didn't deserve equal rights. But you told them they did deserve them. And remained optimistic that what you were doing was right.

And from your place in youth you did not know what the results would be: yes a large amount of equality has been achieved. But you didn't know that your beliefs in comfort would lead to global warming and the depletion of fossil fuels for my generation.

My generation has much greater obstacles than previous ones. We have already had a terrorist attack, to fight in two wars, wages have decreased, we are finishing college, tech school, and high school to enter into an economic depression with college loans to pay off. We have hurricanes caused by global warming that lead to week long power outages in Ohio. We have a housing crisis that is a blessing to us, because at least if houses go down enough we can actually get one. Our colleges have become absurdly expensive. Light crude is depleting at 9.1 percent a year. We are going to have at least 10 more years of struggle with OPEC countries to keep our cars running. And we are going to have to support on our backs 78 million retired baby boomers. 43 million disabled people, 70 million children. And we have 20 million illegal immigrants.

These problems outweigh yours.

I don't know if my generation can fix these problems. And I'm not even sure if they want to. As Norman Cantor said about Rome, they let it fall, because it became a burden to sustain.

But these problems, added together create a such a large problem that it will take a war-like effort to combat it. And war-like efforts can only be fought by governments, not the private sector."

Last, former small business owner A.P. submitted this account of why he sold his business and retired to a smaller investment-based income. I know many of you who haven't been entrepreneurs may not "get" this, but to me and every other small business entrepreneur it rings true. ( Trends for 2009: "Voluntary Poverty" January 7, 2009)

"Last year I elected to move into 'voluntary poverty'. Well, not really by most people's standards. But in a sense by mine. I used to lead a much wealthier life.

For years I had operated a profitable business. My income varied over the years from $0 (nothing) when I started it, to over a $1M (one million) during a couple of years. In 2000, I knew I should have sold my business at the top of the cycle, but too many things were happening personally to get out. When presented the opportunity in late 2007, I took it.

As the business I was in had a certain cyclicality to it (in 2002 I lost money) but was overall quite profitable most years from the fifth year on, had I just 'hung in there' I would still most likely be making over $200k/yr and maybe as much as $350k/yr for the next few down years. As I already mentioned, I sold out instead.

Now I pay no Social Security taxes as I have 'no income' to be taxed. I am living off dividends and interest. And while my portfolio took quite a hit with the market downturn, I am still able to 'make it' on what I have invested as most of those stocks I own were invested in dividend paying instruments of either higher quality, or in the energy sector (which I, like you, guarantee will come back in the next few years). When all is said and done, in the next 5 years I expect my losses to eventually total out to less than 10% of my portfolio, a hit I can easily handle. Even now with what cash I have I am in the markets buying select stocks. But I digress...

I have no idea what my income will be this year, but it will end up at less than the $200k I used to be able to make fairly handily. However, even if it is only $150k, at a 15% tax rate (v. the higher income tax rate plus Social Security and Medicare withholdings) I will still make roughly the same or more. In addition, I get to stay home, watch the markets, hang with the kids, read, and basically indulge myself in whatever I want.

Now I did not quit because I hated my job, or solely to be a 'slacker', I quit because I saw a system that every year seemed to have it 'in for me' more and more. One year the state legislature debated a bill that would have effectively put me out of business in NO time. It missed making it out of the Senate by one vote. In other years I had high workmen's comp claims that were clearly fraudulent.

The last year I had three employees try to 'blackmail' me around the idea of their having to work in an 'unsafe work environment' -- clealy a falsehood. Only with the state, it was MY burden to prove it, not theirs. I ended up paying them off to go away, as to fight it would have meant dollars from my pocket while the state would supply them with all they needed for representation -- also with my dollars!

Every year it seemed to weigh more and more on me -- "Why take the risks?" "Why chance losing it all for a few more dollars?" "Why put up with all the stress?"

So I sold out.

I have vowed not to work for at least two years, though it may be longer with the economy the way it is. As working for someone else is not my idea of fun, there will eventually be another business in my future. But it will be much smaller, with much smaller risks involved, much less capital needed, much less stress, and the ability to simply shut down and walk away if I so choose.

It is simply no longer worth all the effort to be responsible for scores to hundreds of employees when government, with one rule or regulation, can put you out of business and destroy millions in 'wealth' and goodwill. My common mantra over the years was I could always deal with the competition -- it was my government I had to look out for!

So Charles, I am already a living example of much of what you cover in some of your columns -- a guy who ran a small business and quit because of my government more than anything else.

I have a friend just like me (only a lot wealthier). He is living the same stress-free life, though he took much of his wealth and tied it up in real estate. I am trying to convince him to sell out all his apartments, as in the future, he will only get taxed higher and higher on those while being unable to raise the rents at the same rate. He believes his 5% return will stay constatnt. I tell him inflation will kill him over time if added taxes do not. I watched this happen to another friend for years in another city -- where every year he raised rents only to find higher property taxes ate up the added income. He never got ahead."

Thank you, readers, for your thought-provoking comments. We may not know the precise run of the future, but we do know this: it will not re-set to 2006 and the low-volatility bliss of bogus debt-based "prosperity."

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