Brazil Is the New America: How Brazil Offers Upward Mobility in a Collapsing World (23 page)

Higher stock prices are not merely accidental or the coincidental consequence of credit expansion. Close analysis of Federal Reserve data shows that the authorities (also known as the Plunge Protection Team) have persistently pumped money into Wall Street. Phoenix Capital Research observes:

. . .we have not had a period in which the Fed wasn't pumping tens of billions into the markets since 2007. Indeed, the only time the Fed wasn't officially pumping its brains out was between the end of QE 1 (April 2010) and the announcement of QE lite (August 2010). . . .

However, despite the formal declaration that QE 1 was over, the Fed DID continue to pump north of $10–20 billion into the markets every month, ALWAYS during options expiration week (this is pure coincidence of course).
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Business owners, managers, Wall Street bankers, and stockholders obviously gained more from the asset bubbles inflated by credit expansion than persons with stagnant incomes and no collateral.

Of course, I admit that it is difficult to abstract the impact of pure credit money in distorting the economy. Two aspects of rampant credit expansion are hard to grasp. According to Austrian economists, one of the crucial consequences of artificial credit expansion is a dramatic reduction in the efficiency of investment. Creating money out of thin air leads to a big surge of malinvestment, which both reduces the productivity of investment and leaves the economy vulnerable to collapse when the credit orgy inevitably comes to an end.

Equally, at first blush, it might not seem credible that rising GDP and escalating stock market indices are entirely epiphenomena of the expansion of bank credit. What of progress and improved productivity? Would not they account for growing wealth in society and stock appreciation?

The answer is yes and no. Without a doubt, real GDP rises when productivity increases and the economy produces more stuff that counts in material tallies of the good life. But Kelly's argument is that without artificial credit expansion society would become richer without an increase in the supply of money. Nominal GDP stays more or less flat, so that progress is reflected in falling living costs, as happened in the nineteenth century. Therefore, although there would be no explosion in the aggregate amount of profits earned, the real value of each dollar earned in corporate profits would rise.

Then what? A country with sound money in a bankrupt world would stick out like a supermodel in Huntington, West Virginia (widely recognized as America's fattest city). The value of the sound (or even semisound) currency would skyrocket. The conventional expectation would be that foreign sales for products priced in that currency would shrivel as currency movements raised the real costs of labor and all the factors that contribute to production.

Here you catch a glimpse of another reason that fiat money devalues labor. It fosters a race to the bottom. In a bankrupt world, where every economy is more or less addicted to debt, the geniuses who run central banks are all trying to make their currencies worth less. By contrast, the mechanism of progress with gold-backed money would be a steady increase in the value of the currency. Nothing of the kind could be tolerated in a debtist economy.

Witness the continued fulminations of the honorable members of Congress who have spent years trying to browbeat the Chinese into making the renminbi yuan worth more in foreign exchange markets. Consider the House-passed Currency Reform for Fair Trade Act of 2011, which would authorize the United States to slap duties on Chinese goods. Some 150 Congress-folk sponsoring the legislation are perturbed that the Chinese are buying tens of billions of U.S. dollars every month, thus keeping the value of the dollar from plunging as much as they would like.

“This unfair trade practice translates into a significant subsidy, artificially making U.S. products more expensive, and jeopardizing efforts to create and preserve manufacturing jobs in America,” then-House speaker Nancy Pelosi (D-CA), said in a statement in support of the legislation in 2010.

There you see the animating principle of the debtist economy, namely that debt should be proliferated as far as possible, and fiat currency depreciated rapidly so as to lower labor and other factor costs, as well as lower the burdens of debt service. Little wonder that hard-working people get poorer with fiat money. Labor's share of U.S. national income has sunk lower than at any point in the past 60 years. As of June 2011 there were 44 million persons in the United States participating in the Supplemental Nutrition Assistance Program (SNAP) “food stamp” program, up from 27 million in October 2007—an increase of nearly 63 percent in less than four years.

In a better world, sound currencies based on gold would appreciate, rather than depreciate. Nominal GDP and stock market indices would grow slowly or not at all, while real wages and real wealth rose. And no one would mistake Nancy Pelosi for an economist. But note: the fact that she is helping to inform economic policy in the real world in which we live underscores an important, informing reason why debtism eclipsed capitalism as the organizing principle of the American economy. Debtism is better suited to the imperatives of politics.

Politicians want to manipulate economies. When they have the money illusion at their disposal, they can sell their favors to high bids from many factions angling for advantage in a politicized world. In addition to that, the surge in nominal GDP and asset booms that go hand-in-hand with remorseless credit expansion entail great advantages to politicians because they do concentrate income and wealth in the hands of a relative few.

Why does this help politicians?

For one thing, the impoverishment of the median voter puts him in a position of dependence on politicians. Of course, not one voter in a thousand recognizes that the collapse of real income growth is a direct consequence of the failed attempt to substitute debt for higher energy inputs in growing the economy. But it is far more popular to blame “Wall Street” greed and a lack of “regulation.” In other words, give politicians more control.

In light of the analysis we have been exploring, the idea that better regulation could have prevented the Great Correction is superficial and implausible. Yes, certain types of regulation could have worked to keep the system from capsizing into collapse. But such regulations would have countermanded what the politicians wanted to see done. For example, can you honestly conclude that the politicians were prepared to authorize regulations that would have stopped the subprime crisis in its tracks? The politicians wanted to expand home ownership. In fact, they instituted specific regulations, like the Community Reinvestment Act to encourage banks to lend large sums to subprime borrowers in bad neighborhoods.

Equally, the exaggerated capital gains that arise from a rapid growth of nominal GDP create a lot of wealth that politicians can tap into and leverage for their own purposes.

A feature of credit-based money is that it has enabled politicians to more efficiently buy votes. For one thing, credit expansion enables constituents to at least temporarily live beyond their means. Since most politicians' terms are temporary, an ephemeral illusion of prosperity is often sufficient to secure their reelection.

Another, more complicated reward to politicians from runaway credit expansion is its effect in apparently concentrating the costs of government on a small fraction of the population, while spreading benefits to larger voting groups. The inflation of credit leads to higher nominal profits and outsized capital gains for those who are positioned to pocket them. Having helped to fill the pockets of the lucky few, the politicians then help themselves and pick those same pockets.

This is clearly illustrated by trends in Nancy Pelosi's California. In the 1970–1971 fiscal year, before Nixon repudiated the Gold Reserve Standard, the top 10 percent of California income earners paid a hefty 28.2 percent of California's personal income tax. By 2006, given the increased concentration income in the debtist economy, the top 10 percent were paying an astonishing 78.5 percent of California's Personal Income Tax.

While this made life for politicians easier so long as the party lasted, it is also high among the reasons that California is broke now. The politicians laid such a high percentage of the tax burden on a small fraction of the population that when the great correction began and easy capital gains disappeared, California's finances were devastated. Indeed, California was so dependent on a relative handful of rich persons to pay its bills that if even a few of them moved to Nevada, it threatened to undermine the state's bond rating.

What happened in California is a microcosm of what has happened to the U.S. federal government. California's budget situation is more desperate because the state's personal income taxes were more progressive going into the great correction. Also, let's not forget, California's task in borrowing money is more complicated than the federal government's. California must borrow money that already exists. The Feds can lend themselves cash by creating it out of the clear blue sky. And that is exactly what they have done, monetizing 140 percent of federal deficits during the process known as QE2.

One of the more remarkable failures of the mass media in twenty-first-century America has been their silence in reporting the pathetic picture of U.S. federal finances. Notwithstanding the great economic accomplishments by private Americans in building wealth, the U.S. government currently finds itself with fiscal ratios so terrible that they have seldom been seen in even the most backward banana republics. Since 1970, federal spending has skyrocketed, rising more than 10 times faster than the median household income.
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In inflation-adjusted 2010 dollars, median income rose from $39,732 in 1970 to $50,255 in 2009, a pathetically small gain of 27 percent over four decades. Meanwhile federal spending in 2010 dollars was $809 billion in 1970 and $3,551,000,000,000 in 2009, a surge of 299 percent.

In 2010, the United States found itself having borrowed (or printed) $0.55 of every dollar it spent since Lehman Brothers went broke in September 2008.

Think I am exaggerating? Here are the facts. Total net federal debt issued from September 2008 through July 2010 was $3.351 trillion. Gross individual tax receipts came to $3.185 trillion. Less refunds of $660 billion, the net individual tax take came to just more than $2.5 trillion. Add the corporate receipts of $250 billion, net of refunds, and total net tax revenue came to $2.775 trillion. In other words, the fiscal policy of the U.S. government was to borrow $0.55 for each $0.45 of receipts in the till.

This is the kind of deficit spending that has
always
been associated with hyperinflation and economic collapse in developing countries, and even in so-called advanced countries in the wake of wars.

The world's largest economy is fundamentally weak, much weaker than the economic and political establishment pretends. Indeed, I suspect that United States is so weakened that it is in peril of collapse.

This may seem incredible in light of the announcement by the National Bureau of Economic Research (NBER) that the longest downturn since the Great Depression ended in June 2009. I am not alone in thinking that the determination that the recession ended may have been made rather hastily.

As you probably don't remember, but may have read, Herbert Hoover wore out his welcome with the American people by proclaiming, “Prosperity is just around the corner.” Obama is less concise. He says he has taken “the beginning of the first steps to set our economy on a firmer foundation, paving the way to long-term growth and prosperity.”
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You see how politics has improved in the past 80 years. Obama is both walking on the street and paving it at the same time.

Hoover may have been the first president to put a telephone on his desk. But Obama is a pioneer in employing the Internet to tout his economic policies. Instead of an anachronistic promise of “prosperity . . . just around the corner,” Obama launched a web site called recovery.gov that spotlights tales of recovery. It is far more advanced and interactive than the black and white newsreels of speeches that Herbert Hoover could offer.

But contrary to what the powers that be would have you believe, at an equivalent point in his term, Herbert Hoover actually had a more statistically valid basis for his claims that prosperity was soon to return than Obama had for his. Hoover not only spoke in more intelligible prose, he did a better job of combating depression than Obama.

Of course, unless you are a connoisseur of economic footnotes you may not realize that economic recovery after 1929 was arguably more robust under Herbert Hoover than it was under Obama's rule following the 2008 credit collapse.

Contrary to what you may suppose, the depression of the 1930s was not marked by uninterrupted declining quarterly GDP data every single quarter. In fact, the officially recorded downturn in the initial period of depression associated with the stock market crash stretched from the third quarter of 1929 to the third quarter of 1933, almost overlapping Hoover's term. In that initial four-year downturn, from 1929 to 1933, there were no fewer than six—
six
—quarterly bounces in the GDP data. The average rate of economic growth in these up-quarters was 8 percent at an annual rate.

In case you're one of the Green Shoots bulls who imagine that politicians and their advisors have learned ever so much more than Hoover and his colleagues knew in 1929, pause and consider. With his trillions in stimulus spending, Obama engineered his quarterly bounces in real GDP, recording an average rate of economic growth of less than 3 percent at an annualized rate. In other words, while Hoover's economic performance has taken on mythic status as the worst in American history, the bounces off the bottom during the Hoover presidency were more than twice as vigorous as those under Obama.