Reality vs Policy: Fiscal, Monetary, Regulatory

Some folks have said they don’t know much about economics. I’ve often said that the basis is pretty simple: “Who, makes What, for Whom?”. And it really is, at the core.

But layered on top of that is a whole lot of complexity, smoke, mirrors, indirection, and human behaviour.

In particular, this hides that there is a fundamentally real economy of those people (who) doing real work (makes what) and other people who need to get and consume those products (for whom). Note that the words “currency” and “central bank” and even “government policy” do not appear in that list. They are indirect and ephemeral things.

They do have effects. Stuff does happen when they change. In that sense, they are real. But they are an intangible and nobody gets fed with a dinner plate of policy and a side of currency. No company nor factory is built with ‘reserves’ and changes in them, and the central bank does not make nor consume a product.

It is my thesis that in many cases our understanding of how various policy decisions and changes interacts with the Real Economy (that world of working people making things that other people consume) is deeply flawed. In particular, that the understanding is based on a poor understanding of a narrow range of reality and policy, and that at the margin things go all ‘pear shaped’ and the usual rules often yield contradictory results.

But what are these things?

Fiscal Policy is basically the operations of the government. What does the government do in taxing, buying, consuming, and spending? It’s the power of the public purse (and secondarily, the potential mountains of crushing debt it can create).

Monetary Policy is basically the operations of the Central Bank. What does the central bank do in making loans, setting ‘reserves’ required of member banks, taking in collateral, and creating “money” out of thin air in the process.

Regulatory Policy is basically what the government, by fiat, says the rest of us can and can not do. It is the dead hand of government on the shoulder of private actions. (Sometimes this is good, often not so much…)

That is the bulk of what governments (and quasi-government Central Banks) can do. Most economic actions can be shoehorned in there somewhere (with the notable exception of making wars and the massive destruction of everything economic that those bring to the battle location). A case could also be made that “international trade treaties” are not really in these three, but I’m going to count them in “Regulatory Policy” since typically they impact things like tariffs and product regulations on production and quality means; but one can make the case that the tariff part belongs under ‘taxation’ and are “Fiscal Policy”.

Now what the US Constitution (the original intent) did was to strikingly limit what the Federal Government and Bankers could do. Money was to be only precious metals. You can’t do much with Monetary Policy when it is constrained by “dig more money out of the ground” to increase money supply… Similarly, Fiscal Policy was limited by that fixed money and that the public had to buy bonds, or private banks lend, for more of it to go to the government (modulo too much taxation – but that was tightly limited by Senators being representatives of The States, who would rather not see their money being taken). Also Regulatory Policy was basically an empty vessel in the early century since without a lot of money and people you can’t go sticking their noses in everywhere.

All that changed with the Progressive Movement in the 1920s and 1930s. First off, not being able to run over and Play War with all the Europeans due to not enough money was kind of a pisser to Government folks. Secondly, they wanted to do the whole “tax and spend” thing to a much greater degree to enforce their will on others. When “tax” was limited, and spending what was not yours via just printing money was off the table, well, not much fun for those in power. And how can you have a lot of Regulatory Policy with no staff to make rules and enforce them?

So things changed. Under the guise of a ‘war effort’, and starting even before that, we started to change the rules and basically ignore more and more of the Constitution. Central Banking was brought in so the government could more directly manipulate money (though as a sop, it was initially set up as a non-government corporation to be ‘independent’, but yet appointed management via government). Roosevelt got many laws changed (and Wilson is not to be forgotten…) and started the New Deal (along with confiscating all the private gold, constitution be damned) along with some changes to the Constitution. And the Regulation Nation was born. But it took a long time to grow to the monster it is today.

And from then to Now?

After 100 years of molestation, we are now more nearly an easily manipulated Central Authority European Style “democracy” managed by an aristocratic elite. Don’t think so? How many people NOT from the highly moneyed class run major corporations, governments, banks and central banks? It is a tightly controlled club and you are not in it (well, some of you might be, but the odds are 1:1,000,000 you read my blog).

The big question, of course, is simply “Was that a change for the better or the worse?”

Since we can’t have a ‘do over’ and see the alternative reality of not changing the Constitution and then ignoring what could not be changed, I can’t really say. There “were issues” with the old system. Lots of issues. Were those more than the issues of today? Likely not, but unknowable. Not the least of the issues was that in times of war, the Central Authority could not just tell folks what to do. We were at existential risk if the general public just said “I don’t care” or “I don’t believe you”. Nor could it just print money if you hid your gold in a bucket under the chicken coop poop. So little ‘adventures’ like W.W.I and W.W.II would not have been quite the same. Now, instead of ‘war bonds’ and massive efforts to convince the public to melt their silver and send it in; the Feds just print up loads of paper and steal the value of your currency accounts. MUCH easier…

And that all worked well, more or less, up until about the Vietnam War, when Johnson wanted to spend even more than that; so much that it was causing issues for the pledge to be tied to the value of gold, even if we didn’t use it for most things. When that landed on Nixon’s plate, he just reneged on the promise to pay in gold and silver on our currency. That was a major side effect of Monetary Policy (print and spend) being out of alignment with reality (we don’t have that much gold). From then until now the $US has been pegged only to vapor, and the purchasing power is about 95% evaporated into vapor. (Stamps were 5 ¢, gasoline was 25 ¢ / gallon, a car cost $1400 to $1700. Now stamps are 50 ¢, gasoline $2.50 / gallon, a car costs $14,000 to $17,000 for cheap ones, and up to $40,000 for fancy. There’s a whole lot more examples in the same range. Bread from 10 ¢ to $1 to $4 now. etc.)

So what was the benefit of that change of Monetary Policy? More wars more easily. More growth of Central Government. Inflation of housing values (and a load of folks in debt got to kiss it off as it inflated away; while a lot of folks expecting to retire on those payments didn’t…) and more. That is an example of what Monetary Policy can do, and how it can interact with Fiscal Policy. Monetary Policy letting the easy money flow. Fiscal Policy having the government spending the growth to grow, while stealing the value of money deposits and accounts. Robing savings, literally (if indirectly).

Now we are at another edge case, IMHO. We went from very prudent banking and very prudent investing (and very small government and very slow growth of both government and banks) to a world where “finance” counts more than factories and where government makes and breaks industries (see coal as the latest victim of Obamanomics). This has enabled the Regulation Nation to grow to where you can’t open a lemonade stand without at least 2 government agencies involved and 3 more for the taxes (sales, State income, Federal income – 4 if you count SSI).

So I think you can see this matters.

The Reality

There is a real, physical economy. Real people go to real factories and offices and restaurants and car repair shops and make real goods (shoes or radios or financial reports or merger recommendations or hamburgers or replaced alternators..) for other real people.

Lately, a lot of the “manufacture” has moved to Asia (in particular Japan, then China, and increasingly India) leaving us with the offices, restaurants, and repair. (And a lot of agriculture with a little mining – much of it moved to Australia and South America). The problem being that the people in Asia expect to get something in exchange for the real goods they make and send to us. They are the “who” and they made “just about anything that can be shipped” and sent it to the EU and USA. We don’t ship back nearly enough other stuff to balance the deal. It being hard to ship a hamburger or car repair. (That’s the critical flaw in the ‘service economy’ model…)

At the base of all trade is barter. I trade something to you and we both agree we got a little more benefit out of the trade. The classic example is beer and pizza. You have a big pizza, I have a pitcher of beer; we are both happier if we trade 1/2 with each other.

But there is something called “Mercantilism”. One party wants most of the gain, so tilts the deal in their favor. (This can get very complicated if hidden in Fiscal and Monetary maneuvers, as it often is at the National level, more clear when it is different tariff levels and barriers to trade – So I can sell you cars with no tariff, but you want to sell one in my country? Pay a 35% duty at the border…) China has been strongly “mercantile” via things like cutting the exchange rate on their currency and having barriers to entry (so our companies MUST share trade methods but THEIR companies must keep methods secret, and our companies must sell a 51% share to their government, here they have free run. Etc.) This is in the realm of Fiscal Policy (what is taxed) and Regulatory Policy (what must be done).

In the case of Japan and China, we (the USA) handed them about $Trillion or so each of a promise to get back to them someday on the other half of the trade. (That is called a balance of trade deficit and we funded it with Govt. Bonds i.e. debt of the US Government). Now that kind of failure to finish the deal can only go on so long before the other guy starts to catch on that: “I’ll gladly pay you Tuesday for a hamburger today” really means I’m just begging for a handout.

That’s roughly where we are today. Especially after several $Trillions of Real Economy factories, jobs, and wealth have been transferred to China. Americans have ever lower “labor participation rate” numbers. We are no longer the “who” making any of the “what”. And, as we run out of anything real to trade (even our factories and increasingly our real estate is not owned by us) China will eventually decide not to loan us any more hamburgers… That is the basic stress that is coming from letting the China Mercantilist policy run for 20 years unchecked.

Similar things are going on with Europe. It shows up most in places like Greece. Fewer folks can afford the prices of a Greek Vacation (too busy shipping IOUs to China) and the tax policies of the EU ladle on about a 2 x price bump anyway. So businesses pack up and leave Greece for Bulgaria and tourists stay away in droves. Tax, a Fiscal Policy, being a large killer here; but ‘print drachma and spend anyway’ by the government, a Monetary Policy, funded it for decades. Post EU merger, Monetary Policy was in the hands of the ECB, and they would not allow printing enough. At that point “borrow and spend” took over, until the lenders decided to stop lending… Thus the Greek Riots and economic collapse today.

That is the ultimate fate of every single economy where real production is less than real consumption. Eventually you run out of furniture to burn to keep warm and seed corn to eat to avoid being hungry. Even your friends stop lending to you (and eventually your enemies too, but only after they own you and your home).

Some Formal Links

Fiscal Policy:

http://www.investopedia.com/terms/f/fiscalpolicy.asp

DEFINITION OF ‘FISCAL POLICY’

Government spending policies that influence macroeconomic conditions. Through fiscal policy, regulators attempt to improve unemployment rates, control inflation, stabilize business cycles and influence interest rates in an effort to control the economy. Fiscal policy is largely based on the ideas of British economist John Maynard Keynes (1883–1946), who believed governments could change economic performance by adjusting tax rates and government spending.

You will hear “Keynesian Economics” as a common buzz word. It is based on the notion that when the real economy slows down, The Government can act as “spender of last resort” and “spend back to prosperity”. It works, in the very short run. DURING a major recession.

What is forgotten is the REST of what Keynes said. That it would only work for a couple of years then inflation would kick in. That during good times, the government needed to run a positive accounts balance to have excesses to spend in down times. Basically, Keynesian Economics as practiced today has forgotten the limitations and discipline of the original Keynes. This matters.

Also forgotten is that buying more “stuff” by the US Government is no longer stimulative to the US production economy when all the “stuff” is being made in China.

INVESTOPEDIA EXPLAINS ‘FISCAL POLICY’

To illustrate how the government could try to use fiscal policy to affect the economy, consider an economy that’s experiencing a recession. The government might lower tax rates to try to fuel economic growth. If people are paying less in taxes, they have more money to spend or invest. Increased consumer spending or investment could improve economic growth. Regulators don’t want to see too great of a spending increase though, as this could increase inflation.

Aye, now there’s the rub… Tax cuts work, but if The Government then goes into deficit spending too much too long, that leads to inflationary failure. (So we had the “Bush Tax Cuts” that worked, but the Democrats insisted on no matching reduction in spending… Ooops. Similarly under Obama, the spending is going parabolic with the debt. At that point, the benefit of the tax cut is lost in the horrors of a looming $20 Trillion deficit.)

Another possibility is that the government might decide to increase its own spending – say, by building more highways. The idea is that the additional government spending creates jobs and lowers the unemployment rate. Some economists, however, dispute the notion that governments can create jobs, because government obtains all of its money from taxation – in other words, from the productive activities of the private sector.

Increased spending can have a very short term effect. But again, if it does not lead to other people putting money into new factories and new productive capacity, it is just consumption spending and does not lead to growth, nor to persistent economic activity. WHEN (and it is a ‘when’) the directly funded work ends, so does the gain, and you are left with the debt or the higher taxes. See Solindra and the $Trillion or so “Stimulus Package” for “shovel ready jobs” as prime examples of failure.

(Paying folks to shovel holes, then fill them in, does create jobs, but does not increase productive capacity. In the end, you just end up with worn out shovels and workers needing medical care… This matters, but is lost in the noise of “stimulus package” and “shovel ready”…)

One of the many problems with fiscal policy is that it tends to affect particular groups disproportionately. A tax decrease might not be applied to taxpayers at all income levels, or some groups might see larger decreases than others. Likewise, an increase in government spending will have the biggest influence on the group that is receiving that spending, which in the case of highway spending would be construction workers.

Or more often, it goes to the pockets of “Donors and Friends Of Bush Bill Obama Government” and not into production at all. Again, Solindra anyone? Or the wind and solar industry anyone? The fantasy being that if you spend into a large enough hole, “economies of scale” will make it profitable. Folks also forget the matching “dis-economies of scale”. Not all things bigger are better.

That, IMHO, was one of the largest benefits of our original limited government that has been flushed in our rush to Central Authority using Fiscal Policy… Not only is it used badly, but mostly to benefit a few insiders. “Crony Capitalism” is more accurately “Crony Fiscal Policy”.

http://www.investopedia.com/terms/m/monetarypolicy.asp

DEFINITION OF ‘MONETARY POLICY’

The actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as increasing the interest rate, or changing the amount of money banks need to keep in the vault (bank reserves).

INVESTOPEDIA EXPLAINS ‘MONETARY POLICY’

In the United States, the Federal Reserve is in charge of monetary policy. Monetary policy is one of the ways that the U.S. government attempts to control the economy. If the money supply grows too fast, the rate of inflation will increase; if the growth of the money supply is slowed too much, then economic growth may also slow. In general, the U.S. sets inflation targets that are meant to maintain a steady inflation of 2% to 3%.

My, but that sound soo soothing. Missing is that it creates “money” out of thin air, loads of it in ALL the member banks. That it can create enough mountains of debt to crush whole continents, and that the policy can be horridly misused.

Take just that 2% to 3% inflation target. Compound interest is a cold cruel bitch.

First off, ANY investment earning less than 2% to 3% is just a losing deal. Sure, the numbers go up, but the VALUE goes down. Worse, thanks to the Fiscal Tax Policy, you will pay “income” taxes on that phantom gain. So you really need about 5% just to break even.

How many guaranteed investments can you find that give a regular 5% return? Then add another 2% to 3% for profit? So if you REALLY want to make actual progress in the world of the real economy, you need about an 8% to 10% monetary Return On Investment (ROI) just to think about it. That, then, gets reflected in ever higher prices in the real world as a load of otherwise profitable, but marginal, industries go out of existence.

Lets say you have $10,000 real dollars. Stuff it in a mattress. What is it worth after only 10 years of 3% inflation? $7,441 is all. Now remember that is the basic GOAL!

http://www.calculatorsoup.com/calculators/financial/investment-inflation-calculator.php

As per Regulatory Policy, I think that’s pretty clear. The EPA is presently using Regulatory Policy to finish the job of destroying all industry in the USA that hasn’t already moved to China where it is nearly free of such crap.

(Yes, some regulations are needed and good. No, I don’t want to go back to the ’70s and air you can see… but long long ago we left ‘marginal value’ in the dust and moved into “punishment for religious zeal”.)

http://www.zerohedge.com/news/cost-government-regulation-175-trillion

The Cost Of Government Regulation: $1.75 Trillion
Tyler Durden’s pictureSubmitted by Tyler Durden on 07/22/2012 12:04 -0400

The Cost Of “Intervention”

The Competitive Enterprise Institute (CEI) is a small “think tank” in Washington DC which puts out an annual report called: “Ten Thousand Commandments”. The report deals with the regulatory agencies of the US federal government and the cost of the regulations they continually introduce – and enforce. This report would be typical of the regulatory function of pretty well every government in the world.

In all interventionist economies, regulations are not set by the “lawmakers”. The “lawmakers” merely pass the laws, their enforcement is left to the various bureaucratic departments of government. And in order to “enforce” the laws, the bureaucrats see it as their function to impose regulations – countless thousands of them. The cost of complying with these regulations is met by those being regulated. It does NOT show up in the annual budgets (funded or unfunded) of the government.

In their Ten Thousand Commandments 2012 report which was released in June, the CEI estimates the cost of US government regulation at $US 1.75 TRILLION. That is just under half (48 percent) of the budget of the federal government. It is almost ten times the total of all corporate taxes collected and almost double the total collected from individual income taxes. It is also one-third higher than the total of all pre-tax corporate profits. It is the hidden cost of doing business in an interventionist economy. The fact that the cost of complying with these regulations is substantially higher than the total of corporate profits is a stark illustration of the end result of economic intervention. That end result is capital consumption.

In the US, the federal government lists its regulations in what is called the Code of Federal Regulations. These rules of the economic “game” cover 169,000 pages and more than ten new ones are added every day, seven days a week and 365 days a year. In 2011, the US Congress passed a total of 81 new “laws” while government agencies issued 3,807 new regulations. As the CEI points out, if there ever was an example of government without the consent of ANYONE – this is it.

Note that this is from 2012. You need to inflate it by the rate of inflation PLUS the rate of growth of government. Oh, and last I looked we were at about 175,000 pages of regs, so up by 6,000 pages. Call it 2,000 a year. Heck, only two Russian Novels worth/yr…

The Problems

The basic problem, IMHO, is that having lost the wisdom of The Founders that a very strictly limited Government was better than the alternatives, we now have a massive exponentially growing Government that will not stop until the real economy is destroyed.

That is the fundamental character of The Beast. Greater men than me have said that governments grow without bounds.

What makes it all the worse, is that a 1/2 understanding of Keynes causes the folks in charge of Fiscal (spending) and Monetary (printing money) policy to think that the answer to any slowdown is simply more printing and spending of paper money divorced from the real productive economy. And, if challenged on that front, that taxes can be raised to any desired level since the increased spending will make up for it. Forgetting that taxes come at the expense of real economic investment and real economic growth, and that if raised too high, both become negative.

There is, at most, about a 2% / year (sometimes 3%) gain from improved technology and methods. That’s it. Once you are an ‘advanced’ economy, that’s all there is. Backwards economies (like Mao’s China) can have spectacular 12% / year growth, until they reach modernity and have things as up to date as possible. Then we all become “technology improvement limited”.

So do anything that kills just 2% to 3% of your economy, you are in stagnation land. Now think that some added taxes and spending with Friends Of Government is going to make that better, and in the process cause 2% to 3% of folks to pack up and leave, shut down businesses, spend time gaming the tax system instead of inventing, or just pack it in and take Social Security instead of continuing to work, and you are in negative growth land.

That is where we are now. And no amount of Keynesian Games, Monetary Policy, or Fiscal Stimulus Package is going to change that.

The Fed is at zero interest rates now. They spent their “stimulus” on keeping things from reflecting reality while Obama spent us an added $10 Trillion into debt. Not only did we NOT get any real increase in the real economy, but now that they really could have done something in the face of China having a melt down, they are mostly stuck at zero.

Monetary Policy of easy (zero) interest rates could not overcome Fiscal Policy (spend spend spend spend spend spend tax spend,borrow, borrow, borrow…) and now we are in the end game of that mistaken belief that a “spend spend spend” Fiscal policy was stimulus (only during recessions with excess domestic production capacity) and that the Fiscal Policy (zero interest free money for rich people and massive corporations) would somehow get me a job, or give me the opportunity to buy more stuff made in the USA when damn near nothing is made in the USA. The Regulatory Policy coupled with the Free Trade Policy and Appeasement of China Policy has made sure of that.

It is my opinion that this disjoint mis-understanding of how these parts interact is what has lead to the present state of affairs.

China, via Mercantilism, has thought itself the ‘winner’ in that the factories have packed up and moved to China. All well and good until the folks you loaned $Trillion or so have no ability to buy your crap anymore as they are too busy buying food and paying the rent. Clothes? Last I bought was 2 years ago. Not buying more until I have a job. Shoes? Barefoot works fine in the garden. Cars? Nope. Not even a NAFTA Mexican FORD nor an Italian Fiat Dodge nor a Government Motors GM product. Just going to nurse the present crop through until I’m gone. Movies? Well, maybe after they are on Netflix. Or broadcast TV. So how will China get any added growth out of Boomers like me? We are “packing it in”, and there are not enough young ones behind us to take up the slack.

No amount of Monetary Policy can change those demographics. Nor can it give me a real job in a real company. (No amount of H1B visas will either… hint hint… can you say policy F-Up made for Corporate Friends Of BIG Government? I knew you could…) No number of illegal Mexican Aliens can fix it either (yet another policy F-Up). When the jobs are no longer here, Fiscal Policy deficit spending just causes more debt to flow to China (or whoever is still dumb enough to buy it) and more money to flow into the non-spending rich pockets of Friends of Bush, Bill, Obama, Hillary Government. It does not make new productive capacity here in America.

(IMHO, it is that widely felt, if not fully understood in context, reality that has Trump winning right now.)

Then we have a “Funky Day” in America, and all of us “discouraged workers” who are not showing up in the rigged “unemployment numbers” since we are not bothering with the stupid Employment Office (that doesn’t make jobs either) have cut back our spending to the essentials. We’ve started making our own bread, growing our own gardens, not driving to work so don’t need oil. And certainly not buying any new Chinese Crap. ( I have enough dishes, thank you, and don’t need new clothes nor shoes, nor am I buying toys, carpets, paint, whatever). This shows up as a dramatic downturn of exports from China and a dramatic drop of import of materials to China.

Sorry Australia, but your iron ore sales to China will not be supported by my spending as I am not spending. The ripples in the pond spread…

As China wins the Mercantilist War, we stop spending as we are out of work. Then China has exports drop. Their 12% growth drops to 6% (headed for 3%…) all part of the REAL Economy of “Who, makes what, for whom?”. When “whom” is no longer able to buy any “what”, “who” takes it in the shorts…

And that is exactly what is happening now.

China has reported dramatic slowdowns. (Guess why…) This is inevitable in the Real Economy. Made worse by USA Regulatory Policy (think the Coal Miners of Virginia are out buying GM or Japanese cars? Chinese shoes and shirts? Fishing poles or TVs?…)

So China is trying desperately to use Monetary Policy (easy money) and Fiscal Policy (letting government owned companies “invest” in the stock market there to keep the leaky over blown bubble inflated) to keep the game going.

The EU (having raped Cyprus) is busy trying to do it in a less obvious way to Greece (while Italy, Ireland, Spain, etc. etc. are arguing over who needs to have a BOHICA moment next…)

Sidebar: For those unfamiliar with English nuance… BOHICA is short for “Bend Over Here It Comes Again” as in “grab your ankles”…

Think in that context ANY of those countries are going to have a lot of new “investment” in real plant and equipment? Or that they have a lot of extra money to buy more Chinese Crap? So as the EU stutters (based on their over done Fiscal Policies – high taxes – and Monetary Policy – near zero rates but “all your bank deposits are belong to us!”) think folks there are doing real economic investment, growth, and spending? Ask the 20% to 50% youth unemployed how this Fiscal Monetary Regulatory stew is working for them…

And finally as the least worst boat in this ocean of piss, the USA has finally had the toxic mix land at our stock markets (AFTER all the others rolled over some time back).

Does anyone really think that keeping zero interest rates at zero a little longer is going to fix all those Fiscal and Regulatory and Treaty F-Ups? Does anyone really still think that spending more than $20 Trillion that doesn’t exist is going to get more factories built in the USA and more jobs for “20 somethings” in Spain? Or that lining the pockets of AlGore’s Friends with solar projects is really going to result in more cars made and sold in the USA?

And that, IMHO, it the basic pile of poo facing the global economy today.

Fiscal Policy based on expanded government that is already way too big via borrowed money from the Mercantilist who has stolen your productive capacity and is now on the investment rocks itself from silly policy. Spending your way to wealth does not work for individuals, nor for governments; and the other half of Keynes was all about that.

Monetary Policy based on the notion that you can inflate away the debt at 2% to 3% and that works just fine (while ignoring the inflating away of value of saved money and currency balances / loans), and having buckets of free money given to megacorporations and megabanks will somehow increase individual ability to purchase when not possessed of income.

Regulatory Policy based on the notion that “Beatings will continue until moral improves” and Trade Policy based on “Maybe if I just bend over and grab my ankles more often they will be nicer to me…”

In Conclusion

Hopefully this helps some of the folks who thought they didn’t know much about economics see that mostly it is just a bunch of very fancy terms getting in the way of clarity about reality. And that unfortunately, that often clouds the vision of just those most highly educated folks in charge of trying to run the whole thing. They think Policy determines reality. In reality, policy can nudge the real world but only for a little while (and often in the wrong direction). Policy can break the Real Economy, and can shift some demand forward in time, but it can not improve it.

It is my considered opinion that The Founders realized that Hubris was the most lethal sin of all, and that any Government possessed of a Central Bank, Income Taxes, Monetary Policy other than mining gold, and a taste for War Adventures; was fundamentally flawed. So they made all of those either forbidden or extremely hard to do.

It is to the shame of generations since that we have undone those limits. Now we are harvesting the fruits in the form of Monetary Policy, Fiscal Policy, and Regulatory Policy. We’d be better off without any of them, painful as that might be; and The Founders knew that. Because they had seen the power of Hubris up close and personal.

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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20 Responses to Reality vs Policy: Fiscal, Monetary, Regulatory

  1. EM – it would be so good if our various governments understood this bit of wisdom. The UK makes so much money from “financial services” which are basically pushing numbers around without any real gain of wealth that it has become around 10% of the GNP last I looked. We didn’t need those dirty industries if we could make more money in banking.

    I’ll admit I was figuring that the Chinese workers would have been getting higher real incomes by now and thus the diminishing cost differential of “made in China” causing work to come back home, but it looks like although the work is starting to come back a lot will be automated so we won’t get all the jobs back. The cost of complying with those regulations makes starting a new business (especially in manufacturing stuff we need) pretty difficult. Much easier if you don’t employ any people.

    At the moment it’s hard to see a way to wind things back from the edge. With all those nice service jobs in the West and all that manufacturing capacity in China, it’s looking very unbalanced overall.

  2. BobN says:

    We shipped jobs to China and borrowed to keep things going, but we are at the end of borrowing so everything slows down and the guy loaning us money sees his source of money drying up, so he quits lending. We now have free fall of everything and I think that is where we are at.

    The dollar will become worthless, but the good side of that is we can load up a few unused oil tankers with dollars and pay china off, ridding us of the debt. This will piss China off and they will need some kind of drastic action as their people will be losing jobs and will be unhappy with government. To keep power the leaders will do what leaders always do, start a war to blame it on. the same thing will happen in Russia and their leaders will look for excuses. We have many things to fight over so a big war is easily instigated. war has traditionally been the bail out solution, but this time there are nukes and many more million will die than is customary for an economic realignment.

    I see the,”this can’t be happening'” moment coming very soon.

  3. Roger Sowell says:

    Good article, EM. After reading it, it occurs to me that the US can (and should!) do exactly what China did in the past decade. China built up their country- roads, railroads, ports, bridges, skyscrapers, factories, power plants. We, as a mature country, already did all that decades ago. So long ago, in fact, that much of the infrastructure now needs replacing. Bridges especially. Still, it is a home-grown set of expensive, labor-intensive and machinery-intensive projects to replace bridges. And we could and should demolish buildings that do not meet code, and renovate those that we can. Just a thought.

  4. p.g.sharrow says:

    Like all Bureaucracies, those in China have wasted much of the wealth on Grand public projects and corruption. Building for the sake of building does not create Wealth. Lining the pockets of friends and corrupt officials does not create wealth.

    Only Mining, Manufacturing and Farming create new Wealth. Everything else is part of the shuffle of moving that wealth to the consumer. Much of the manipulation in government is to create and control “toll booth” position that insures collection of some of that wealth as it moves from producers to consumers.

    China has tried to corner manufacturing to make use of it’s vast under utilized population but the bureaucrats have wasted far too much. Their Grand Miracle growth spurt is ending as this Dragon devours itself..

    Bureaucrats ALWAYS destroy the society they shepherd, ALWAYS. They covet power and wealth and will stifle creativity and drain resources for their own use. It is what they do, their reason for existence.

    It is them or us. We don’t need them. They must be shackled and starved for us to grow and prosper…pg

  5. John Robertson says:

    I’m with PG on bureaucracy.
    Bureaucracy and fire are both driven by their nature to consume every resource they can reach.

    The real economy will continue to function as people have to eat, however a cull of the parasitic load is going to hurt.
    The units of trade are broken, currency is only a promise to pay, as good as the trust between trading partners, I wonder what the next units will be?Something parasites cannot fake.

    As we are in an inverted pyramid scheme of takers over makers, collapse is unavoidable.

    Over at Jo Nova tonight, ROM comment #31 mentions Kondratieff Waves, I hope to read more tomorrow, this Russian saw long cycles of rise and collapse of economic systems.
    Apparently Stalin disapproved of this thesis and killed the author.
    So it may be these cycles, of development of a civil society, its appropriation by the freeloaders and the collapse of production are human nature at work.

    Practical society, more wealth, more parasites, debt, more taxes, strike by makers, collapse and war.
    Repeat endlessly.

  6. M Simon says:

    What you leave out is how because of “interest” on the “debt” (money is debt in the current system) things have to be done to keep the system in balance.

    Catherine Austin Fitts explains how it is done in “Narco Dollars For Dummies”

    http://www.ratical.org/co-globalize/narcoDollars.html

    Now lets see. Narco Dollars represent about 10% of trade flows. Those flows are “outside” the system. If the banks get 1/2 the flows then at 5% interest everything balances.

    Catherine Austin Fitts is a former managing director and member of the board of directors of Dillon Read & Co, Inc, a former Assistant Secretary of Housing-Federal Housing Commissioner in the first Bush Administration, and the former President of The Hamilton Securities Group, Inc. She is the President of Solari, Inc, an investment advisory firm. Solari provides risk management services to investors through Sanders Research Associates in London.

    “The Latin American drug cartels have stretched their tentacles much deeper into our lives than most people believe. It’s possible they are calling the shots at all levels of government.” –William Colby, former CIA Director, 1995

    ===========

    Except the cartels being in control is misdirection. It is the bankers…

    You might want to look up “money laundering banks”. And especially those banks in Asia that perform that service. “Tojo opium” is also an interesting search.

  7. M Simon says:

    Kondratieff Waves are about the waxing and waning of technological improvements. It goes in cycles. The leading edge of the wave is VERY profitable for early adopters.

    Imagine steel pots selling for $50 and you have the only blast furnace. What happens when competition ramps up and steel pots are now $5?

    The same happened with computers. We are near the end of that wave and nothing as big is now in effect. It will be a while before the next wave starts. Some think biotech. But at this point no one knows. It could be endocannabinoid medicine. Robots. Or something else. It is not that we don’t have the tech. What ever it is – it is already in existence. It is just not generating enough cash flow.

  8. M Simon says:

    p.g.sharrow
    25 August 2015 at 3:46 am

    Scientific research creates wealth. Or at least in the modern age is the basis for wealth creation.

  9. M Simon says:

    Roger Sowell
    25 August 2015 at 12:52 am

    I could devise a code that requires ALL current buildings be destroyed. If we did that the country would become rich from the destruction and building boom. Or we could just start small and break windows…..

  10. M Simon says:

    http://www.tomatobubble.com/id880.html

    Jefferson: “I believe that banking institutions are more dangerous to our liberties than standing armies.”

  11. M Simon says:

    Lets say you have $10,000 real dollars. Stuff it in a mattress. What is it worth after only 10 years of 3% inflation? $7,441 is all. Now remember that is the basic GOAL!

    My calculator say .97^10 = 0.73742412689492826049 approximately.

  12. M Simon says:

    Nothing made in the USA? I’m not so sure. Mfg used to be about 20% of the economy. I think that currently it is about 18%. So we still manufacture a LOT. Especially industrial tools. People around the world buy them.

    What has happened? The same thing that happened to farming in the 1920s. We don’t need so many people to make all that stuff. The beginning of robots was CNC machines. And at one time the US was a leader in that. We are now a leader in robots. Some are special purpose like a CNC mill or lathe. Or a robot hamburger maker (McDonalds) And some are more general purpose. The prices are now so low that we are on the verge of replacing nearly all unskilled labor.

    BTW to be the world’s reserve currency we HAVE to run a material trade deficit. Otherwise trade will stagnate. We get it back with financial services. Or as is happening now “safe haven” services. There is value in being the least corrupt big government on the planet.

  13. M Simon says:

    My calculator also says 1/(1.03^10)= 0.74409391489672511311867591581901

    Which is basically your answer.

  14. M Simon says:

    Catherine Austin Fitts on the Empire at War: https://www.youtube.com/watch?v=DHpCiygY2GU

    Catherine and I corresponded for a while. She has a number of videos up. Check them out.

  15. thechuckr says:

    Great article by Chiefio. The interest on our National Debt of $19.5 trillion, currently at record low interest rates, will exceed total USA tax collections quickly and eventually exceed entire GDP should interest rates rise to historical levels assuming anemic (and highly questionable) economic grown of 1%-2% continues. Put more prosaically there are more dollars of national debt ($19.5 T) than there are stars on the Milky Way (2.5 – 3 B).

    I am not sure there is a way out of this without devaluing the dollar and/or defaulting on national debt which, knowing the elected gutless spineless sniveling cowards that have been elected, would be the path taken, rather than instituting tax cuts, REAL spending cuts, especially those related to wealth transfers and Government hand-outs, reducing red tape and regulation, and chopping the number of career bureaucrats to a small fraction of their current number.

  16. Jason Calley says:

    Hey E.M.! Great post! No, really, I only wish that the neo-Keynesians in the think tanks and universities had as clear a grasp of what has been going on.

    You say: “Then we have a “Funky Day” in America, and all of us “discouraged workers” who are not showing up in the rigged “unemployment numbers” since we are not bothering with the stupid Employment Office (that doesn’t make jobs either) have cut back our spending to the essentials.”

    You are very right to point out the ripple effect of a large segment that has ceased to spend so much, but even worse is that there are millions of people in the same boat who are (effectively speaking) unemployable at the moment. Consider this; I have a close friend who is EXACTLY the kind of person that any reasonable business would love to hire. Mid fifties, very bright, personable, conscientious, quick to learn, well spoken and extraordinarily literate, non-drug-user, etc. etc. He has spent most of his life in sales in various parts of the science and technical fields. After two years of fruitless searches in job areas he was good in, he just recently took a job as a cashier. There is nothing wrong with being a cashier, but his talents could be used for much higher levels of productivity. This is equivalent to having a twenty dollar bill lying in the street and no one will pick it up. This is like having a bulldozer sitting and rusting while people are digging holes with shovels. There are MILLIONS of people with a high potential for productivity whose skills and labor are going unused (at least as far as the market goes.)

    Something is very, very wrong. The system is broken. The combination of taxes, regulation, fiat money creation, buying of legislators, uncertain international factors — I could name more, but the point is that we have such a maelstrom of factors weighing down the free market that large sectors of business and large numbers of workers are being forced to reduce their productivity.

    What can’t go on, won’t. We live in interesting times, huh?

  17. Paul Hanlon says:

    Unfortunately, I cannot get back to the article because I’ve reached my “article limit”, but in this Economist link, the chap writes that there is something like a $28trillion hole in the Chinese books, money borrowed over the years to finance the infrastructure changes, cities to nowhere etc.

    If that’s true, we’re hosed, because on top of that there’s also been the massive amounts of foreign investment into China and the massive export surplus. And yet despite all that, China has to devalue it’s currency to keep ahead?! My postman tells me that the Chinese government pays for the postage from China, what happens when that discontinues? It could be just one of the things that helps create a cascade effect downwards. Sure, some jobs will come back to the US and EU, but we’ll all be the poorer for it.

  18. p.g.sharrow says:

    The only thing that the Chinese have to sell is cheap labor. Devaluation keeps labor cost cheap. The Chinese people want to be paid more so they can buy the stuff that they make to sell to us. Stuff that brings them money to buy food and materials that they must buy to survive. Building public works that are unneeded keeps people working but does not generate real wealth. Egypt did this many times. Always the same result, as the building boom ended so did the economy. It would take several generations to regain the wealth of generally good times that allowed the Elites to dream of New Great Works that would be testament to THEIR greatness. With wealth comes POWER. The power to conscript workers and their wealth to do the bidding of the Elite. With bureaucrats comes power to regulate and force compliance to the Elite’s demands…pg.

  19. p.g.sharrow says:

    Americans still create vast amounts of real wealth. 80% of all manufactured goods consumed by them are made by them. They still feed 20% of the world, Most of the raw materials that they use they produce.
    Crushing regulation of everything has become a strait jacket of controls and costs that are causing a near static growth profile while the government Elite waste the wealth produced on Monuments to their Greatness and whims.
    Yearly cost of regulations on American society may well exceed the actual cost of the Federal government. But the Strait Jacket is a killer to any growth…pg

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