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Tuesday, November 29, 2011

Economically, Where Do We Go From Here?

Every day I awaken and watch Morning Joe.  It is an entertaining morning show, a mixture of politics and many other topics.  But it is mainly politics and economics.  It is, by necessity, not slanted left or right.  Joe is Joe Scarborough, former Congressman from northern Florida, and Mika Brzezinski, daughter of President Jimmy Carter’s Secretary of State, Zbigniew Brzezinski is his co-host.  Mika is moderate left, and a supporter of our current President, and Joe is fairly right, and takes a conservative, albeit holistic, view of our nation’s appropriate governance.  At any rate, I highly recommend this show for its substantial breadth of commentary and subject matter.  There are other reasons to watch it, and it is nearly always entertaining.  I am also a fan of Huffington Post, believing that it is the closest thing to a truly middle of the road major media publication, as it is extremely inclusive of commentary from nearly every angle.  I also consistently read one of the most cogent of all economic blogs, The Baseline Scenario, published by Simon Johnson, ex Chief Economist of the International Monetary Fund and MIT professor, and his blogmate, James Kwak (see http://en.wikipedia.org/wiki/James_Kwak).  These sources are great sources of stimulating and thoughtful commentary, and I highly recommend them to any who might be inclined to tune in.

I decided to write the following based not only on many recent readings, among them Michael Lewis’s Boomerang, and Naomi Klein’s The Shock Doctrine.  I also decided that it was time to let my readership in on my well-considered view of the dire state of our national and international economic situation.  As a lead in to my conclusion, I simply want to point to the following:

1.      American politics is substantially controlled by the American oligarchy, that is the citizens and corporations (or companies) which control the majority of our national privately held assets (i.e. money and possessions). 

2.      The massive disparity between the haves and have-nots in America, about which many articles have been written, and which is the primary motivating force behind the Occupy Wall Street and “Occupy” movements in general.  In America it is truly the 99% at the bottom vs. the 1% at the top of the economic food chain. 

3.      The total corruption incorporated in the United States Tax Code, fostered and perpetuated by the purchase of our government by the US Oligarchy which exists in our present defacto system of government, most appropriately characterized as a plutocracy.

4.      The desperate straits in which a vast majority of our 50 states find their budgets and fiscal well-being.  Under present circumstances the states are wont to increase taxation, since the massive unemployment and failure of real estate markets has substantially drained the tax base of even potential resources which could serve to support the continuation of basic state governmental services.  They are cutting services continuously on all fronts in an effort, a losing effort, to keep up with their budgetary constraints, remembering that states cannot do deficit spending, by law. 

5.      The failure of the Super Committee to create any kind of legislative resolution to the federal debt problem.  Presently our national debt stands at about $15 trillion dollars or about 100% of GDP.  This is not sustainable in the long run, but, owing to our economy’s essential weakness (I believe that, although we are not now technically in recession, that is running a negative GDP, we are still in actual recession because there is no real estate market, and there are more than 58,000,000 Americans either unemployed or massively under-employed according to BLS calculations.  See http://en.wikipedia.org/wiki/Bureau_of_Labor_Statistics).  It is important to note that America did not emerge from the Great Depression until after WWII, which served as a massive stimulus to the economy, and that, after WWII, America had a debt to GDP ratio of more than 150%.  The way we handled that debt level was to tax at very substantial progressive rates (see http://en.wikipedia.org/wiki/Income_tax_in_the_United_States), with the top rates at or above 90% for more than two decades.  The greater tax collections allowed us to develop massive infrastructure, including the Interstate Highway System, to make massive loans to Europe under the Marshall Plan which allowed for a more rapid recovery and greater growth in exports, and to provide housing and education to veterans of the War from the Veteran’s Administration.  It also led to the development of a very large and stable middle class.  

It is important to understand that nearly every serious independent economist, as well as Ben Bernanke, has stressed the need to do everything possible to encourage and cause growth in our economy, and not to worry about debt reduction in the near term, but to devise a plan to reduce that debt in the long term.  The failure of the Super Committee is completely acceptable, except that it did no arise from a recognition of the relative urgency of its work, but rather from massive political polarity, which is truly deadly and destructive.  The failure of the Super Committee simply points to the massive dysfunctionality of our Congress.  The inability of our Congress to find a solution to creating a level of greater revenues through tax reformation is a key issue.  There needs to be a combination of reformation of our 15,000 page Tax Code, and an adjustment of the present rate structure to recognize the need to redistribute our national income.  I know that income redistribution is a sore subject, seen often as associated with Communism and Socialism, but, when the system is rigged to benefit a very small portion of our society, then it simply must be changed. 

6.      Lastly, unless we can reform our political system such that those voted to public office consider their primary obligation in governance to be the general public weal, nothing will change.  There are lots of movements and suggestions to this end in many quarters these days, and I see many as favorable potentially.  I am certain of only one thing, and that is that whatever is done must be done by Constitutional Amendment.  The Supreme Court rulings in both Vallejo and Citizens United, which recognized money as speech and corporations having rights equal to individuals, are utterly contrary to sanity in government.  Hence the need for a Constitutional Amendment.
Considering all of the above factors (and others unmentioned here), as well as the fact that Europe is suffering from many of the very same problems in governance, and general economic malaise and weakness, the European economic union is about to collapse.  It has no meaningful path forward to maintain its unity.  Once German bonds began not to sell last week, the writing was on the wall (see this article:  http://www.bloomberg.com/news/2011-11-28/the-euro-area-is-coming-to-an-end-peter-boone-and-simon-johnson.html, which is only the latest written by Simon Johnson of The Baseline Scenario and his friend and fellow economist Peter Boone, both of whom are recognised experts in international and, specifically, European, economic issues).  We live in a truly globally connected world, and its most major international connections are banks.  Owing mainly to massive political power, the banks are in horrible shape.  They are not appropriately regulated, especially with respect to the related issues of capitalization and leverage.  They are all heavily invested in international bond holdings.  They are all massive participants in the substantially under-collateralized world of derivatives (much of the nearly $600 trillion dollars of which are in credit default swaps, or hedges against the upcoming collapse).  This bank problem, of course, is where the real peril is, and the single greatest reason why the various European Union members have not been able to come to a consensus regarding fixing their economic crises, that is owing to the fact that all of their resources are essentially directed at saving the massively corrupted mega-banks, which are all closely affiliated with the big six in the US.

Of course, the ultimate upshot of the massive corruptions of the international financial world is that the next crash, when, not if, it comes, will take down all of the world’s economies, large and small, since they all are so closely tied.  The coming crash will be an order of magnitude larger than the one which occurred almost exactly three years ago, since it will result also in an untold magnitude of political and cultural upheaval.  You see, it is quite different when we are talking financial losses for the 99%, and when we are talking about the destruction of all wealth, including most of that held by the 1%, and the upcoming crash will take all of us, even the wealthiest.  In the new world which emerges, if we can maintain social sanity,  things will get massively better, but it will take a fair amount of time and patience for this to happen.

Be prepared, it’s only a matter of time.

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