Beware of the plan to save the economy!

by Atash Hagmahani |January 27, 2009

Someone owes you $X, and doesn't have the funds to pay you.
The central bank monetizes $X amount of new government borrowing to build roads and bridges we don't need, and to pay for wars that destroy personnel and infrastructure.
Since new money has been created, the financial experts declare that the central bank has “prevented deflation” and thereby “saved the economy”.
You are still broke. You have to shut down your factory, liquidate its assets (to the benefit of those who are subsidized), lay off all your workers, and stop producing goods.
This isn't a “solution”; it's a scheme to take wealth away from producers, and to give it to politically-connected spenders.
Any asset that is an inflation hedge isn't fungible, but it will produce bogus “capital gains” against a deflating currency, so that you will be forced by way of taxation to give up some of your savings when you convert back to currency. Drip, drip, drip...there it goes...away.
Any asset that is productive will have a hard time finding customers, unless that customer is a bank or the government. Any asset that is fungible is subject to inflation, and any asset backed by the “full faith and credit” of the US government comes with a premium price tag despite loss of purchasing power to inflation.

Why here?

Whenever there is a recession, the central banks lower interest rates in order to “lower the cost of borrowing”. Borrowing for what? Wouldn't it make sense to borrow money at low interest rates, an then re-invest the money in whatever economy anywhere in the world, where returns are highest? Which, guaranteed, will not be here? Doesn't this just subsidize carry trades, speculation, and offshoring of production and jobs?

The concepts behind “saving the economy” do not correspond to anything real

Unfortunately, many people assume that having such a thing as “THE PRESIDENT'S AMERICAN RECOVERY AND REINVESTMENT PLAN” implies that the plan is actually going to cause a “recovery”, and worse, they're actually going to act on this belief. Millions will be paid to do so!

There are no semantics corresponding to the syntax. The plan isn't about recovery or re-investment.

Trickle-down socialism

Here is President Obama's economic plan, copied verbatim from http://www.whitehouse.gov/agenda/economy/:

Doubling the production of alternative energy in the next three years.
Modernizing more than 75% of federal buildings and improve the energy efficiency of two million American homes, saving consumers and taxpayers billions on our energy bills.
Making the immediate investments necessary to ensure that within five years, all of America’s medical records are computerized.
Equipping tens of thousands of schools, community colleges, and public universities with 21st century classrooms, labs, and libraries.
Expanding broadband across America, so that a small business in a rural town can connect and compete with their counterparts anywhere in the world.
Investing in the science, research, and technology that will lead to new medical breakthroughs, new discoveries, and entire new industries.

Now, please go through the list, and carefully consider how each item is going to help John's bicycle courier service or Susan's apartment-cleaning service. Subsidizing activities encourages those activities, but no net benefit. The government pays university laboratories to pointlessly torture monkeys to death, and the rest of us can't afford medical insurance premiums! Subsidizing energy conservation will have the perverse effect of public utilities raising their rates. Even insofar as it could be argued that money will eventually trickle down to small business owners, the demand structure for products and services will change so that demand for John and Susan's products and services falls relative to demand for, say, material and labor to insulate government buildings, even as their cost of doing business is driven UP by competing government activities that get the money first. “Chaos” refers to the concept that small differences in initial conditions result in big changes down the stream of cause-and-effect. This is actually a huge difference; the downstream changes to the economy will be massive. My bet is that John and Susan go bankrupt, accelerating the demise of small private businesses for the benefit of large, politically-connected big business that get the contracts to insulate government buildings and supply schools with (foreign-made) equipment. More on this phenomenon later!

Now, go through the bulleted list again, and ask yourself how each one of them is supposed to fix the problem of misallocation of capital. I would argue that each item is more of the same! Consider, for example, the bulleted item concerning equipping schools. Suppose that we buy several million new microscopes for high-school labs—while illiteracy and innumeracy are rampant! How is this going to teach students who currently can't, how to read (and comprehend) and do arithmetic and algebra? How do we know that those new discoveries and entire new industries are coming, and furthermore, arriving at at least the rate at which old ones are collapsing?

The problem is that if policy states that the government cares about “education”, and that “education” will magically produce engineers and scientists to staff a dazzling high-tech wonderland always somewhere in the near future, then the reality of our failing educational systems is totally ignored. The problem is that if the plan states that subsidized broadband will help small businesses in rural areas compete globally (with counterparts abroad that don't have as many boondoggles to subsidize), then the plan is carried out as if it really would make American business more competitive. It also assumes that global competition is even relevant to all the businesses that will be taxed for subsidized internet: how do you import a haircut from Pakistan to Missoula?

It reminds me of screaming headlines in communist countries proclaiming “Wheat harvest exceeds all expectations!”, while the food supplies run out before the end of the line of people waiting for rations.

Misallocation of human capital

Human capital is more important than any other sort. You might want to familiarize yourself with Rahm Emanuel's plan for mandatory “civil service”. Here is a brief intro to get you started:

http://www.youtube.com/watch?v=l0B7dOQwKm0

If you are curious or concerned enough you might look for a used copy of his book, The Plan: Big Ideas for Change in America. (Hmm...”big ideas”...)

Some people would argue that 3 months (to start, I suspect) mandatory service is no big deal. But consider: the problem is not that young people in North America and Europe are too productive; the problem is that too many of them go to college, where even students pursuing practical degrees such as in nursing or engineering are forced to take classes with no practical applications, economic or otherwise, that I can think of, and thereby remain unproductive for typically 4-6 (usually closer to 6) more years of adulthood. Many students go to college and study nothing economically useful; this would not be an issue if they were all wealthy heir(esse)s but they are not. The “western” countries now have a crisis whereby they are supporting ever larger fragments of the population (both young and elderly) that are net consumers, who produce little or nothing.

A point that I keep coming back to over and over again, is that most people mistake consumption for production whenever it is expressed in glowing terms of imaginary benefits to “society”.

"The illusion of freedom will continue as long as it’s profitable to continue the illusion. At the point where the illusion becomes too expensive to maintain, they will just take down the scenery, they will pull back the curtains, they will move the tables and chairs out of the way and you will see the brick wall at the back of the theater."
-- Frank Zappa

There is also the question of the government knowing what is best for you. What if those 3 months just happen to be your last? You might have a terminal illness and not know it. Or you might want to pursue a personal relationship, and instead get a “Dear John” letter. You might need to take care of your sick grandmother. All other options are off the table; someone else decides. What is the point of mandatory civil “service”, that “society” didn't even know it needed until someone said so?

Reliving delusional vainglory?

Many people I know in my parents' and grandparents' generations absolutely adored Franklin Delano Roosevelt because they claim that “he cared about people” and that “he got us out of the Great Depression” through socialism and war.

I don't want to debate those points because numerous thoughtful authors here and elsewhere have already laid out sensible arguments for the rest of us; in any case it seems intuitively obvious that printing money and wasting it on boondoggles, death, and destruction, does not create prosperity. Instead, my concern is that if this is what enough people believe otherwise, and if some of those people have the political pull to make it happen, then they might very well try to re-live their interpretation of what they think happened to resolve the last economic depression. Might this be the real purpose behind mandatory “service” requirements?

Consequences

Loss of more small business
Loss of real capital
Loss of employment opportunities for those who do not “qualify” to be Obamabots
Human lives wasted in mandatory, unproductive activities
Continued loss of rights to person and property

What do do

“Everybody talks about the weather, but nobody does anything about it.”
--Anonymous, but often attributed to Mark Twain

I don't like to complain about economic policy, without coming up with a plan to do something about it. I always offer lots of advice whenever I submit an editorial for publication.

Sometimes the wisest thing you can say is “I don't know”, and unfortunately I think this is one of those times. My best advice is to vote with your feet while the option is still available, and I would suggest starting with your young adults. I realize, though, that circumstances vary, and that this is not a solution for most people. My next best advice is to focus on keeping your job and to have a backup plan for lasting as long as possible if you lose it anyway. Consider the possibility of making a pact with relatives or friends; whoever still has a job provides shelter for whoever doesn't.

Savings first; invest only what you can afford to lose. For most people, now is not a good time for any speculation; Warren Buffet is quoted as saying that a rising tide floats all boats, but when the tide goes out, you know who's been swimming naked. Unfortunately, a lot of people mistake speculation for investment, and have fared accordingly during the bear markets.

Personally, I'm taking advantage of the “inflation-deflation” debate, by buying assets that hold their value against inflation AND that pay me dividends or rent to buy-and-hold them, whenever the “deflationists” seem to be winning the battle. I like dividends and rent because I can understand what I'm paying for. Buying virtual stock certificates or electronic bonds, hoping that someone else will buy them from me, hoping that someone will buy them off of themselves, etc, for no apparent reason other than hope, let's just say is out-of-character for me.

What do you think? Share your ideas on my forums. Maybe the synergy of a lot of smart people can come up with solutions.

No need to be glum

Over conversation at the family dinner table, a new friend of mine recently scolded me for “looking so pleased with myself”for “having figured it all out”. Indeed I saw this coming a long time ago...haven't lost a penny...made some money though I must say it's getting rather harder than it used to be...

Too many people either bury their heads in the sand because they don't want to deal with reality, or they realize that the economy is in trouble but then despair about it. My new buddy was scandalized at my cheerful countenance as I laid my theories out regarding what happens next, while other people are looking at the same facts and jumping out of windows.

Jumping out windows doesn't help. Think of better ideas.

Look: the sun will still rise tomorrow! Tomorrow morning, go outside and cheerfully greet it. The world is still a beautiful place. Life is challenges and victories; embrace it all.

Financial information and observations cited in this editorial do not constitute financial advice. Make your own financial decisions after consulting with appropriate professionals.

Atash is the editor of MutuallyAssuredSurvival.com, where you can find ideas for surviving petroleum depletion, globalization, economic starvation, and other hazards of life in the 21st century.

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