The Keynesians only know one trick: crush the dollar, and then crush it some more.
I have to begin this column with a confession. For some weeks now, I have been making fun of George A. Akerlof and Robert Shiller’s book, Animal Spirits, without actually having read it cover to cover.
I suppose I could complain that the stack of books teetering on my bed stand is already high to do serious damage, should it ever come unbalanced and collapse on me in the night.
I might even point out that I did skim through a good bit of a colleague’s copy while he was at lunch – certainly enough to pick up on the veins of Keynesian thought that lie just beneath the surface of the tome, like gristle in a cheap steak.
But that’s really not much of an excuse, considering the scorn I have piled on the treatise and its authors. Also, at some 230 pages, Animal Spirits is really quite short compared to most such essays. Seriously, the first volume of Gibbon’s Decline and Fall is over a thousand pages by and of itself. So Animal Spirits is really just a light read.
Well, now my very own copy has arrived. I was busily working my way through it, when I came to the first of what I am sure will be many stoppers. And while I am sure that I will have worked my way through the whole book by the next time I write to you, I really could not wait another moment to address this one point.
Right now, you could “pirate” $18,187 from corporate account #865851
A little-known clause buried deep in Section 77F of the SEC code gives you the legal right to plunder huge lump sums of cash from any public corporate account. And as I write this, you could swipe an easy $18,187 from just one of these accounts.
The Gold Standard: Cause or Effect
In Akerlof and Schiller’s analysis of the causes of the Great Depression, they handily bypass the Crash of 1929, choosing instead to focus on various central banks’ defense of the gold standard. Their theory is typically Keynesian: the attempts of Monetary Hawks to reduce the supply of currency led inevitably to nigh fatal collapse and rampant deflation. The longer a country refused to devalue, the longer they suffered economic paralysis.
Now, we could argue till the cows come home as to whether or not it was necessary to abandon gold at the time. Akerlof and Schiller were not writing back then, they are writing today, and being widely read now by people who have acquired an enormous amount of power.
And so I feel it is necessary now to point out the incredible economic distortions that have been foisted on us by Akerlof and Schiller’s Keynesian predecessors.
The Happy Single Income Family
Because I do not want to argue about extremity, but rather point out the catch in what we consider “normal” these days, I will not make comparisons with the extreme conditions of the Depression or WWII, beginning instead with 1947.
In 1947, we already were “enjoying” the first fruits of inflation. The median annual family wage was $3,300. And the most significant investment a family could make, a new house, cost twice that: $6,600.
With a loaf of bread costing a mere 13 cents, and a gallon of gas going for around 15 cents, most families found that they could aspire to this level of prosperity with minimum levels of debt and a single income.
A Little Less Happy, But Still Keeping up
Now let’s dial our little “Way-Back Machine” forward just a tad, to 1967. Annual income is now $7,933, a new house still costs roughly twice that ($14,250), and a gallon of gas is 33 cents.
Over twenty years, wages and costs have doubled. But at least they are all still in rough proportion to each other (at least in mainstream America).
Now, however, we have some backburner issues bubbling to the foreground. We have a major (voting) portion of the country with its nose up against the glass window of that happy suburban existence, and an administration in Washington looking for ways to both fund and distract from an intractable conflict overseas.
The Worst Sort of Innovation…
The resulting spending spree would send inflation spiraling out of control. By 1987 a family earned $30,970. But at $92,000, a house of your own cost three times that. Gas had also tripled to 89 cents a gallon.
By 1987 keeping up with the Joneses required two new features your 1949 family was completely unfamiliar with: An overtaxed credit card with a permanent rolling balance, and two incomes to pay for it all.
Both these items are critical, as they exactly describe the chasm we would fall into come the end of 2007.
6 trades that could save your retirement...
With America's foremost market analyst at the helm, that's all you'll need to turn around your retirement fortunes. He's done it before (numerous times) and he's not slowing down anytime soon. And to prove it to you, we'll give you 21 months of his profit-packed service FREE. No matter if you've lost $50 or $50,000, he can get it all back, and then some! Find out for yourself...
The End of the Line
In 2007, the median family income had doubled again to $60,200. But a gallon of gas hit $3.25, a nearly four-fold increase. That 15-cent loaf of bread now runs you $2.75 (and tastes like cardboard, by the bye).
And a new house would run you $212,300, provided you didn’t live on either coast, where a body could easily borrow $750K to drop on a nice little McMansion with delusions of Georgian grandeur and a postage-stamp-sized lawn.
Now both mom and dad are working 60 hours just to keep up with the interest payments on multiple credit cards. The house has been borrowed against so often, many families have negative equity. Savings accounts have been stripped to the bone. And most family investment plans are about to get cut in half for the second time in less than 10 years.
Blackmail, Plain and Simple
This is the Keynesian blackmail that is being peddled about by Washington these days. Either you let us drive you further and further into a black hole of personal and government debt... or we allow the entire house of cards to collapse, in the process throwing half the country onto the unemployment line.
I know this concept is hard to swallow, but here it is. “Full Employment” is not a benefit that any society should aspire to. Rather it has been the most inflationary vicious trap in the history of mankind. And as long as we attempt it, we will see a perpetual cycle of ever more destructive booms and busts.
Sincerely yours,
Adam
P.S.: In case I was too long winded and somehow obscured my point, I will restate it bluntly. As long as the Keynesians have their hands on the levers of power, you absolutely cannot go wrong staying short the dollar and long gold.
Article brought to you by Taipan Publishing Group. Additional valuable content can be found at www.taipanpublishinggroup.com. Republish without charge. Required: Author attribution and links back to original content.
written by Diane Bodenstein, June 13, 2009
Wealth in this country is now more concentrated than it has been at any time since 1929, and the redistribution of wealth from the middle and working classes to the wealthy has been "sold" to the American public by means of the availability of cheap, easy credit - so long as they could borrow to finance their purchases, people would 'not notice' how much economic power was being taken away from them. At first, this primarily took the form of credit card debt; but credit card companies kept their APRs artificially (in fact, usuriously) high while mortgage rates were made artificially low. This, along with recent amendments to the bankruptcy laws (drafted by the credit card industry - yet another prime example of how short-sighted greed can 'do one in') prompted people to pay off their credit cards with home equity loans; but on a macroeconomic level, this is basically just a shell game - you can move the debt from under one shell to another - any way you slice it, it's still debt, and you still own nothing! Once people can no longer borrow any more, we are all faced with the essential fact that the average consumer's purchasing power cannot support what's produced at current price levels. Given the fact that the beneficiaries of this wealth redistribution have had no trouble whatsoever in paying inflated prices and still continuing to see their purchasing power vastly increased, it seems to me that to blame it all on inflation is naive at best and downright dishonest send self-serving at worst. Furthermore, you correctly acknowledge that, notwithstanding some inflation, housing prices stayed in line with median incomes from immediately following WWII straight through most of the 1960s, during which period we underwent a substantial redistribution of wealth away from the super-wealthy to the middle class.
The economists, pundits, media and "experts" alike all readily acknowledge that, like it or not, our economy is now 70% driven by consumer spending. They also dutifully report and acknowledge that, over the past 30 years or so, a substantial re-concentration of wealth has taken place, to the point where the top 1% now controls over 90% of the wealth in our country. And yet, somehow, no one is willing to add 2+2 and connect those dots.....
-
- +0
-
-
Apparently, our esteemed economists fail to grasp the concepts of "bubble" and "correction," suggesting that when prices then fall to more realistic levels they are "depressed." In fact, the median price of a home nation-wide (including the coasts) was well over $400,000 at the peak - a whopping NINE times the median household income; but the fact that such prices are obviously unsustainable seems to have escaped everyone. Which brings me to another, obvious point that Shiller fails to appreciate: namely, that only a small percentage of homeowners buy or sell their homes in any given year, so a majority of homeowners bought their homes long before the peak of the bubble at much lower, more affordable prices.
With such complete lack of common sense displayed by our supposed "best and brightest," it is refreshing (indeed, comforting) to finally see an article by someone who can still add 2+2. Your observation regarding the squeezing of the middle class is right on point; people could no longer afford basics like food, energy and transportation, all of which have been knocked out of the CPI calculations for the political convenience of inept presidential administrations (there is also, as you shrewdly point out, the matter of two very unpopular and unnecessary wars and the "weapons of mass distraction" factor, but that is a whole other can of worms I won't venture to tackle here). Credit was made artificially cheap and readily available in the form of mortgages and home equity loans, so home prices soared beyond all comprehension and people began using their homes as ATM machines by refinancing based on such over-inflated values, until there finally were not enough buyers able or willing to support the vastly inflated housing prices on which this house of cards depended.