By Peter B. Meyer – 2nd of January 2013

Since the days of Bismarck, money is taken from citizens and paid back in the form of various social spending programs. The ever-successful politicians allow spending to outstrip revenues, but not as much that it appears irresponsible. The more benefits promises the more voters, to gain more power, and the more money is shifted to the favored insiders.

Growth over the last hundred years; in population, GDP, wages, prices, made it possible to expand government spending significantly, ever anticipating larger, richer generations that would support the smaller group of incapables and elderlies.

The mathematics of this system held up fairly well, until recently. Now, population growth rates are falling everywhere in the developed world, with a huge group of baby boomers preparing to retire and voting themselves the most lavish benefits in history. Without growth, this system of public financing is doomed to spectacular failure. More spending will not be better; it will be disastrous.

By Peter B. Meyer – 5th of December 2012

Contrary to the general opinion; disasters don’t provide any economic growth or any wealth advantage. The U.S. government announced that gross domestic product grew in the third quarter at an annualized rate of about 2 percent, which today is revised to 2.7%. That’s hardly vigorous growth, but considering the previous quarter’s annualized rate of 1.3 percent, the news was received with optimism. But optimism is unwarranted. As the U.S. Commerce Department’s Bureau of Economic Analysis explained: “The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), federal government spending, and residential fixed investment.” 

To put it another way, what grew was not the real economy but GDP - a statistical construct that is subject to a myriad of assumptions and dubious measurements as, for example, inflation. And the reason GDP grew at a higher rate is that the government and consumers spent more than previously.

So despite what pundits, politicians, and the news media tell us, this doesn’t bode well for the future because economic growth, as opposed to GDP growth, requires investment, which is made possible by saving. But saving is consumption deferred. One reason people save is to consume more in the future than they can purchase today. An economy cannot consume its way to real, sustainable growth.

Commentators never tire of saying that consumption accounts for more than 70 percent of the economy. But this is highly misleading. Adam Smith accurately wrote, “Consumption is the sole end and purpose of all production.” That implies that consumption isn’t the way to make an economy grow by consuming more. That only sabotages the potential for real growth.

John Maynard Keynes who thought recessions, made the fallacy popular and depressions were signs of inadequate aggregate demand and that therefore saving was harmful. But it’s not true. Rather a recession is the inevitable consequence of a previous boom, or bubble, prompted by money inflation and cheap-credit policies pursued by the government’s central bankers. These policies stimulate interest-rate-sensitive sectors of the economy, such as housing and stages of production remote from the consumer goods level that depend on real savings for sustenance.

But when the Federal Reserve System creates money out of thin air in order to lower interest rates, it gives the illusion of new savings - deferred consumption - and therefore misleading signals to entrepreneurs, who direct resources and labor to parts of the economy that never would have expanded without the inflation. The recession occurs when the central banks print too much money, true consumer preferences come to light, and the inflation-induced investment is revealed for what it is: malinvestment.

Economic recovery requires a shift in resources and labor from where they were mistakenly diverted to where people’s real consumption/saving preferences direct them. This process is costly and time-consuming - and that’s where the need for saving comes in. If the recovery is to proceed, government and its central bankers must keep hands off, and interest rates have to be allowed to find their true market levels. If growth is to resume and employment increases, market corrections can’t be impeded. But politicians and central bankers aren’t typically willing to step aside in such circumstances because they want to be seen to be doing something - even if the something is the wrong thing to do. That’s the position we’re in today.

Long-term investing is risky enough. When government adds to the risk - when no one can be sure what new taxes and regulations may be coming down the pike - investment becomes all the more dicey.  

What’s horrifying is that President Obama, Fed Chairman Ben Bernanke, and Congress have been doing precisely the opposite of what economic recovery requires. In addition to the programs, the Obama administration has tried to prevent the housing market from correcting for the massive distortions wrought by the Fed and federal housing programs as they inflated the infamous bubble. Again the government and its central bank seem determined to re-inflate the housing bubble. For example, under QE3 the Fed for the foreseeable future will buy $40 billion worth of mortgage bonds each month, providing easy money and low interest rates for the mortgage market. “Our mortgage-backed securities purchases ought to drive down mortgage rates and put downward pressure on mortgage rates and create more demand for homes and more refinancing.” Bernanke said.  

This is precisely the sort of policy that set the table for the housing bubble and consequent Great Recession in the first place. No good comes from artificial stimulation of markets.

The Fed also plans to continue to hold the federal funds rate to near zero well into 2015. To the extent this keeps other rates down, people will be discouraged from saving and encouraged to spend and borrow. Thus, the government is discouraging savings needed for sustainable economic growth.  

“Policy makers have cost the U.S. economy a decade or more of normal economic growth,” is said. That represents real hardship for millions of people. The politicians and their appointees once again have shown themselves to be incompetent managers of the economy - which is to say of our lives. It is time that all privileges, regulations, and interventionist entities - including the Fed - were eliminated and that a free economy is allowed to emerge. Economic growth is too important to leave to the government.

"The broken-window fallacy," wrote Henry Hazlitt in his 1946 gem Economics in One Lesson, "under a hundred disguises, is the most persistent -- and rabble-rousing -- misunderstanding in the history of economics."

Taking his cue from the 19th-century French economist Frederic Bastiat, Hazlitt tells the story of a vandal who breaks a bakery window. The baker supposedly stimulates the economy with his purchase of a new window. Never mind that he'd hoped to buy a new suit with the money and the glazier's gain is the tailor's loss.

"No new 'employment' has been added," Hazlitt sums up. "There is no upside to wealth destruction. But try telling that to the folks who calculate GDP.

"It is very likely the ‘Sandy’ hurricane will be given credit for any fourth-quarter fake economic growth. After all, that's how government affects the GDP. The more it spends, the higher economic growth appears to be." And it gets worse: Private-sector production - the stuff that doesn't get shifted from one pocket to another is falling. With consequence, real economic growth is falling even more.

Peter B. Meyer – May 14, 2012

Debt levels have to come down, but falling debt levels mean a contracting economy and more unemployment. That is the major issue and the rest is detail.

There are many unaddressed structural and systematic problems too grave to ignore that remain so despite the millions without jobs, savings, homes or futures. Our leaders let aggravate these crisis conditions while voters reelect them despite demanding change. Unemployed teenagers "face the risk of going from being unemployed to becoming unemployable." Today's reality is bleak. In short it is "a multi-faceted unemployment crisis that politicians, fail to comprehend, and to address. "The failure to agree on orderly debt reductions led to disorderly defaults, tariff wars and further worldwide collapses of production and employment in 1931, the last Great Depression.

Developed countries will find it very difficult to grow, as result of the enormous weight of debt, while most capital is “invested” in unproductive, zombie industries. Population growth remains stagnant. And important to recognize, much of the growth have already been materialized as the result from increased use of credit in the past to buy thing from the future. That future has arrived now.

Austerity doesn’t work. EU nations like Greece, Portugal and Spain tried it. They cut spending. They fired people. But they got nothing from it. Their budgets are still far out of balance, with deficits way above the 3% limit demanded by the European Union. Unemployment goes up. GDP goes down.

Actually living beyond your means is no longer politically or socially acceptable. You have to live within your means. The only question left, is ‘who will pay for all this debt’? The answers to that question are not easy. When debt levels were low, the answer was probably ‘future generations of taxpayers.’ At today’s debt levels it is unlikely that the debt will ever reach future generations. And with so much of the debt taken up by the central bank the burden shifts, from lenders to borrowers, to taxpayers and consumers.

Low interest rates are a kind of push around. They take money from savers and redistribute it to debtors. Borrowers, such as the big banks, get money at a preferentially, artificially low rate. While savers pay the price.

“Governments won’t be able to fulfill the promises made to their citizens. The grand bargain of the modern, social welfare state will begin to look more and more like a bad deal. Young, unemployed people will become increasingly fed up. They will look for radical solutions, while more radical leaders provide answers that most likely are wrong too. To be responded to by Governments with inherently reactionary answers in the best of circumstances, to finally react with repression, not too peaceably executed. Governments will cultivate their zombie clients, like the Ancient Regime did, by protecting them. The defense industry, for example, will probably successfully direct citizens’ rage against imaginary foreign enemies, and thereby increase its own power and wealth.

The Russian economist Kondratieff confirmed that economic cycles are more powerful than government. And that while the government can alter the impact of a smaller "normal" bubble, it is helpless in the wake of a true "Super-Bubble." According to Kondratieff, the government's act is a hopeless charade. The real economic cycle is going to run its course, no matter what the government does.

Real prosperity can't come until all the "poison" is out of the economic system. The result of underestimating these cycles is catastrophic, and a force much more powerful than any government can control. So the real economy will weaken. Revolution will begin. Finally, the middle class will be broke the poor were already broke and the country will be ruined by the Elite.

Eventually, the government you have counted on to "save" you can't even save itself. This is not easy to accept. Despite being in the back of your mind, most people will simply choose to ignore it, hoping it goes away on its own. Hopefully you are meanwhile smarter than that.

What should be done won’t be done, why do we suffer any longer with the EU that was already dead on arrival? How is it possible for a real recovery to take root in the hard, barren soil of falling house prices and slipping consumer earnings? The economy is not improving, and then there should be no increase in inflation, and no pressure on the price of gold, right?

A rise in the price of gold is associated with inflation. But gold is much more versatile than people think. It protects your wealth when paper money loses its value. It also protects your wealth when paper money gains in value. During the Great Depression, for example, the price of gold rose, against dollars, even though the prices of food, clothing and other consumer items were falling in dollar terms. Why? Money gains value, relative to goods in a depression. Gold is money. It is the best money. It is the only money that has stood the test of time.

Besides, there is more going on. In a financial crisis, or a depression, investors begin to doubt that their counterparties will make good. Banks fail. Investors go broke. You own a mortgage, and then you discover that the homeowner has left town, and the house has lost half its value. You own a note, and then you discover that the payer is bankrupt; your note is worthless. You own shares in a company; and then the company goes out of business.

When you are in a de-leveraging phase, you discover that many of the assets of the previous credit bubble are not assets at all. And while you’re waiting to find out, the best thing to have in your safe is gold. Gold coins that you’ve stored personally give you something whose value doesn’t depend on the health of the economy, doesn’t depend on any financial institution and doesn’t depend on any government policy.

As uncertainty rises; so does the price of gold. The price of gold also rises when the return on other assets declines. At 1.82%, the real return on a 10-year T-note is negative. Consumer prices are rising faster. So, the reward for lending to the government is less than zero.

Normally, holding gold costs you money. You give up the return you could get from ‘risk free’ investments Treasury debt. Now, you give up the risk from reward-free investments. Gold goes nowhere. It produces no yield. It pays no dividends. It makes no profits. You can’t live in it. You can’t drive it. You can’t hang it on your wall and admire it.

But when the return on Treasury debt is negative, what do you give up by owning gold? You give up a loss! And your Gold coins are portable, they hold their value no matter where in the world you might take them, and they are internationally recognized and accepted.

Tags: Austerity, Growth, inflation, economy, Europe, EU, IMF, debt