A House of Cards

moneymapThe economy isn’t showing signs of recovery yet.  Should we all panic and start buying guns and stocking up food?  I guess you can never be too safe but that seems a bit crazy right now — unless you feel you might be laid off.  Then it might not be such a bad idea, it could be a while before you are working again and it is unlikely you’ll fully recover your salary for years.

Think about this, companies are looking to lower their costs and they are doing so through lay offs and off shoring.  Obviously, this means higher unemployment as we have been observing.  The October numbers are very disturbing as unemployment has climbed to 6.5%.  (The last time unemployment peaked so high was March 1993.) As the supply of labor increases, salaries will float lower.  Its your basic law of S&D, but we have an additional kink in the works that was lacking when unemployment hit 7.8% in 1992 – off shoring.  Sure there were some jobs being shipped to Asia in ’92 but it was a tiny trickle.  Today there is a fire hose shooting jobs away from the U.S., not just low paying jobs but any job a business can move cost-effectively.  That good paying job you just lost could be your last for an extended period of time.  Not only are you now in a long line of applicants, but your job might no longer be required since someone, making 5% of your former salary in Malaysia or China, has replaced you.

But high unemployment alone is not what makes this recession different than 1992-93.  Geniuses in the government and in the financial sector have leveraged debt to a dizzying height.  In 1981 President Reagan pointed out that the U.S. debt, (not the deficit, but debt – the accumulation of all the deficits since the founding of the nation-sorry I had to explain it for the dunderheads who don’t know the difference), had reached one trillion dollars.  An astonishing number, he illustrated by explaining that,  “a trillion dollars would be a stack of $1000 bills 67 miles high.”  That was mind numbing at the time.* (Yes, Reagan left office having nearly tripled that number but that’s another blog.)  When W.J. Clinton took office the U.S. National debt was $4.1 trillion, when G.W. Bush was sworn in it had swollen to $5.7 trillion (notice how the surplus was never applied to paying down the debt.)  Now here is where our economy goes from very deep debt to insanely deep debt, On the day the stock market began its plummet, September 15, 2008 the debt had skyrocketed to $9.63 trillion, a number no one can understand.  Here is where I lose my mind, since September 15 the United States has increased its debt another $1 trillion dollars!  On November 14, 2008 the U.S. Treasury reported the national debt to be $10,617,806,584,635.27.

This number is meaningless to the human mind.  It is simply too big. Then we have derivatives, I have a BS in Business and yet I have to admit I don’t fully understand the concept completely.  Wikipedia notes that, “Derivatives massively leverage the debt in an economy, making it ever more difficult for the underlying real economy to service its debt obligations and curtailing real economic activity, which can cause a recession or even depression.”  The article goes on to point out that high federal debt contributed to the Great Depression.

Debt to GDP
Debt to GDP

You may hear Republican politicians and Talk Radio personalities talk about the debt in terms of GDP and growing our way out of the debt.  The current debt to GDP ratio has not been as high as it is now since Ike was paying down the cost of WWII.  Robert Bixby, director of the centrist Concord Coalition, says, “The [U.S.] economy would have to grow at an implausible rate forever,” in order to grow our way out of this debt.  Bixby goes on to say that in less than 20 years, Social Security, Medicare, Medicaid, and the interest on the national debt “will consume all the tax revenue the nation can expect by then.”  I suspect this has already begun to snowball and the process has accelerated out of control.  Perhaps we’ll fulfill this prophesy within the next four to six years.

Lowest Income Tax Rate 1929-1940

Highest Tax Rates1925-1945

Democrats seem to bury their heads in the sand, trusting they can tax their way out of debt.  They fail to understand that taxes suppress economic growth, they do not encourage economies to grow and never have. The press loves to point to the FDR’s The New Deal and credit it with ending the Great Depression. In fact, it is likely that the The New Deal may have extended the depression rather than ending it. Certainly people benefited individually from jobs they would not have otherwise received but the required tax burdens slowed business and thus GDP growth.   Under The New Deal the top income tax increased from 25% to 79% and the bottom income tax multiplied eleven-times, (Graphs M.J. Perry, 2008.)  Unemployment jumped from 4% in 1929 to 25% in 1933. Had taxes not been so dramatically increased would the recovery have been faster?  I don’t know but I believe the answer is yes.  Was FDR’s New Deal necessary?  I think so but we must understand it is a bitter pill and the stage is set for a repeat performance.

I find it significant that the current debt load dwarfs the debt load in 1929.  I find it incredibly frightening who is holding that debt.  China holds the second highest amount at $541billion.** Oh just a minute, did China just announce an economic bailout plan?  They did, $586 billion. Would anyone like to speculate the best way to finance it?  Well, if this were my personal finance or my company’s, I would cash in some of the T-Bills I was holding.  I expect China has exactly that in mind.  So how will that affect our economy?  I’m not certain but it doesn’t look good to me.  Bloomberg.com reported John Wilson, co-director of equity strategy at Memphis, Tennessee-based Morgan Keegan, as saying, “The market doesn’t really have a handle on the depth of the recession’s duration.”  I think that is an understatement.

I began this piece saying it might be premature to stock up on food.  Does that mean I think we should not be prepared for the worst depression this country has ever experienced?  No.  Just not sure the timing is right now.  I have felt for years that the mounting national debt and loss of manufacturing would eventually catch up to us.  We can blame Democrats, Republicans, bankers, stockbrokers, WalMart, or nearly anyone else.  We all contributed by electing politicians hell-bent on building power.  Some achieved this by helping to craft the laws and regulations to benefit business while others did the same to benefit special interest groups, and yet others did so to benefit themselves and their friends.  This should not surprise anyone.  The heart of democracy is the ability to vote for the guy who will give you the most stuff.  Unfortunately, that isn’t the recipe for a quick economic recovery.

The majority always votes for the candidate promising the most benefits from the public treasury with the result that the Democracy collapses [due to] loose fiscal policy.
--Earliest print appearance May 3, 1959, The New York Times Book Review
* If a thousand dollar bill is one tenth of a mm thick an actual stack equaling one trillion dollars should tower 100,000 km or 62,137.1 miles. (I don’t mean to quibble with the President but it looks like he may have lowered the number to make it more palatable.)  If my math is correct the current debt in one thousand dollar bills is 659,759.7 miles high.  That’s roughly twice the distance to the moon.  (Feel free to check my math, I’m no mathematician.)
** Look who holds the number 4 spot on this list.
  1. Well, it’s good to see you blogging about the economy. I’m planning one on the CRA soon which should be interesting. I would like to tell you that I am totally aghast. I find this blog unbelievable and just completely bewildering. Let me get this straight: YOU have a college degree?!? When did YOU go to college?!? I recall going off to college in 1981 like a good little boy while you traipsed around Europe for four years! But I digress.

    This does bring up a good question. I keep hearing about how much we are in debt and yet it seems we have an endless stream of money just laying around for banks and credit card companies and people with bad mortgages. . .whoever. How much CASH does the Federal Reserve actually have in supply. Or do they do what i think they do and just print more when they need it. I heard that the Fed gave a $2 TRILLION loan (with at T) to someone and we don’t even know who!!! That’s almost the entire budget of the federal government!! There’s something going on here and I’d like to know what it is. First, I don’t think the economy is as bad as we’re being led to believe. I’m not saying there aren’t issues, but I don’t think the sky is falling. Second, if the sky is falling, why do we have so much money to start handing out to anyone who’s “too big too fail.” Who else is too big too fail? How about the record companies. Do you know how many people they employ? I’m not sure either but I’ll bet it’s a lot! What about television? Wait. . .that IS too big to fail! (Whew, that was close!)

    We obviously have to cut spending as well as taxes and unfortunately, despite a sterling record on national defense, I fear Bush’s legacy will be the size of this bloated government.

    • anamericanidiot
    • November 21st, 2008

    Nice comment. Nearly a blog in itself! And yes I do have a BS in Business Management from the University of Minnesota. We must disagree about the severity of the economic distress we are now in. A few moments of research reveal that the Federal Reserve has $2.2T in reserves. The Fed can loan out more than it holds in reserve and in fact much of the reserve is debt. Check this link: http://www.federalreserve.gov/releases/h41/Current/

    I’ll all for giving credit where credit is deserved but Bush’s record on national defense is debatable. I think his record post 911 on homeland security is closer to your description. Can you tell I’m not a Bush fan? I think I understand yuour point on this one, though. He rebuilt in part if not in whole the military after 8 yrs of defunding and shrinkage, (real men HATE shrinkage.) Unfortunately, he used it in excess and engaged puny powers that were not serious threats, which cost us in world opinion.

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