The impending sovereign debt crisis is either upon us or just around the corner depending upon how you define time. If you thought 2008 was interesting, you ain’t seen nothing yet!

The BIS (Bank for International Settlements) is the central bankers bank. When it makes pronouncements, one must listen. The Telegraph reports: “The Bank for International Settlements does not mince words. Sovereign debt is already starting to cross the danger threshold in the United States, Japan, Britain, and most of Western Europe, threatening to set off a bond crisis at the heart of the global economy.”

The US has projected debt increases over the next ten years increasing by about 10% per year. This debt estimate does not include the unfunded liabilities which are growing exponentially. GDP for this same period is likely to average 2-3% at best, assuming there is not a double-dip.

To believe that these numbers are practicable, borders on the insane.

Will the US  fall? Will the EU collapse? What will happen to the social fabric when entitlements are cut back drastically if not eliminated? These are all good questions that only in the passage of time will be answered.

James Quinn has an article assessing current conditions through the eyes of H. L. Mencken.

As usual, Quinn and Mencken are excellent.

Albert J. Nock, libertarian, wrote a book entitled Our Enemy the State in 1935. It is an interesting book for those who believe or don’t believe that the masses are little more than fodder for the big guys. In Nock’s opinion, the role of government everywhere has been to exploit the population by transferring both wealth and power from the private sector to the public sector and its allies.

The book is well written and appeals especially to the young. Perhaps it is because of the rebellious stage of youth (think college kids worshipping Che Guevara) or perhaps it is because your mind is still open. Most outgrow the book by their early and middle work life as they focus on the difficulties of career, family etc. Then, interestingly enough, many rediscover the book. In my case, I wondered why I ever set it aside. Others I have spoken with feel the same way.

Perhaps this cycle has been so for previous generations with this type of book. Or perhaps it is unique to our circumstances, where so much of what Nock said now rings true. Here are a few quotes:

It is unfortunately none too well understood that, just as the State has no money of its own, so it has no power of its own.

… the State has ever shown any disposition to suppress crime, but only to safeguard its own monopoly of crime.

Lincoln’s phrase, “of the people, by the people, for the people” was probably the most effective single stroke of propaganda ever made in behalf of republican State prestige.

Taking the State wherever found, striking into its history at any point, one sees no way to differentiate the activities of its founders, administrators and beneficiaries from those of a professional-criminal class.

Given our circumstances, it is easy to understand why people might feel cynical regarding their government. Is what we have gone through (and is still ahead of us) necessary or was Nock correct all the time?

The two-part video below dealing with the Federal Reserve, the banks and the government seems supportive of Nock’s position. Was he correct? Are we little more than feedstock for the powers that be?

Part I:

Part II:

We know that Social Security is broke. Ditto for Medicare and Medicaid. Ditto for the Federal Deposit Insurance Corporation. Ditto for the Post Office. Ditto for Fannie Mae. Ditto for Freddie Mac. Ditto for Amtrack.

The Federal Government has proven to be incompetent in virtually everything they touch. The states are no better. Their pension funds are underfunded by over $3 trillion with CA alone accounting for a half Trillion of this. They do no better with unemployment insurance as the following report from CNN shows.

Imagine, the states are depending upon the bankrupt Federal government to bail them out! That is like asking your neighbor whose house is being foreclosed to help you make your mortgage payments. What a mess and there is no sign of it easing.

The Feds have no money. When does this charade stop? Hard to tell, but it will stop!

All bleeding eventually stops, one way or another.

The developed economies are in terrible shape. Western democracies are all insolvent as a result of runaway welfare spending and commitments that are destroying their economies.

The sclerotic economic performance in Western Europe has been apparent for decades. Less known is what has been happening in the US. Economic growth, wages, employment ratios and standards of living (except for the debt explosion) have been declining since the late 1970s.

It is impossible for any welfare state to survive without defaulting on many of its obligations and promises. I have a post out to another website,  waiting for them to publish it. It deals with this topic and will be available here in about a week.

Europe is starting to crack with Greece in crisis. The other PIGS will soon follow. What you are witnessing is merely an “extend and pretend” strategy. No cures or corrections are being made. All that is aimed at is deferring the crisis. It may buy some more time, but it cannot solve the underlying problem of insolvency amongst western Democratic states.

Anyone foolish enough to believe the government propaganda that the recession is over and we are coming out of this is in for a rude, and presumably financially devastating, awakening. The fraud and corruption that has been covered up is slowly oozing to the surface. The US banking system is in shambles. It is only a matter of time before it implodes.

Commitments made by the US government, especially with respect to social welfare promises, will not be met. The commitment to a huge, new entitlement (Obamacare) was heroic, unwise and suicidal. It is impossible to save Social Security, Medicare and Medicaid in their current form. Adding Obamacare to the mix is the height of irresponsible government.

Martin Wolf, who started blogging, posted on “Does Austrian economics understand financial crises better than other schools of thought?” He had this to say regarding Austrian Economics:

Yet some would argue that economists working in the Austrian tradition were more nearly right than anybody else. In particular, they have argued that: inflation-targeting is inherently destabilising; that fractional reserve banking creates unmanageable credit booms; and that the resulting global “malinvestment” explains the subsequent financial crash. I have sympathy with this point of view.

In his short blurb, Wolf is unwilling to accept the Austrian prescription to cure the crisis.

It was interesting that he was willing to explicitly criticize “conventional neo-classical equilibrium economics” (whatever he means by that), while unwilling to criticize Keynesianism or Monetarism:

I think we can say that conventional neo-classical equilibrium economics did a poor job in predicting the crisis and in suggesting what should be done in response. We can also say that neo-Keynesians pointed out some important precursors of the crisis, in particular, the destabilising role of huge private sector financial deficits in countries with large external deficits, such as the US, and the Keynesian view certainly played a big part in the post-crisis response, as did that of Milton Friedman.

The promising title of Wolf’s article proves to be little more than an unsatisfactory come-on. While he alludes to the fact that Austrians have a better understanding (“were more nearly right than anybody else”), he cannot bring himself to accept either their prescriptions or reject the mainstream schools that created the mess. Perhaps he would alienate too many friends in the profession.

The article is worth reading only because of its vacuity and the hoops Wolf goes through not to criticize the schools directly responsible for the crisis.

The Fed’s Shell Game Continues… April 07, 2010

Chris Martenson

Executive Summary

• Record-breaking Treasury auctions continue to go off without a hitch, thanks to massive foreign participation.
• However, the amounts reported to be bought in the auction results do not match the Custody Account or TIC report amounts.
• The Fed is allegedly all done buying MBS and Treasury paper. This cuts off an important source of liquidity for the Treasury, commodity, and stock markets.
• How will these markets respond to a liquidity drought?

April is upon us. I need to take a moment to re-analyze the data to see what might happen now that the stimulus money has worn off, and, more importantly, now that the Federal Reserve’s massive Mortgage Backed Security [MBS] purchase program is over.

This is important for a variety of reasons. The first is that the enormous flood of liquidity that the Federal Reserve injected into the financial system has found its way into the Treasury market, supporting government borrowing and also lowering interest rates for the housing market. How will the Treasury market respond once the liquidity spigot is turned off?

The second is that this flood of liquidity has supported all sorts of other asset markets along the way, including the stock and commodity markets. What will happen to these when the flood stops? Will the base economy have recovered enough that the financial markets can operate on their own? Will stocks falter after an amazing run? Or will the whole thing shudder to a halt for a double-dip recession?

To read rest of analysis click here.

The government policy of not requiring banks to write down their assets to market values does nothing but prolong the economic crisis. In a desperate attempt to pretend that the economy is getting better, the government is doing anything it can to inflate economic results, postpone consequences and defer what is inevitable.

The banking charade has been called “extend and pretend.” It allows banks to “extend” their survival by “pretending” that their assets have values well in excess of market. It cannot work! The toxic assets, one year later, are just as toxic or more so than they were a year ago.

Markets will eventually prevail, and the next banking crisis will be much worse than what we experienced in 2008.

Tyler Durden, in a post dealing with this issue, contrasts the current approach with Volcker’s approach to the banking crisis in the early 1980s. He concludes:

Therefore, once the era of Musical Chair Trading ends with some ridiculous non-event that will send everyone panicking, the banking sector will be right back where it was on Septmber 18, 2008—the only difference, of course, being that Bernanke has already shot his wad, and politically, it will be impossible to pass another TARP.

That’s when the world ends—the second crisis will be loads worse than the one in the fall of ’08. Loads worse, even, than ’29.

When will it happen? I don’t know. Then again, I don’t know when the Yankees will next win the Pennant—but I’m pretty sure it’ll happen.

“Extend and pretend” could have been used to do what Volcker did in ’82—the Volcker Call. But Geitner, Bernanke, Summers, and ultimately Obama himself lacked the will or the gumption to force the banks to do what needed to be done—clean up their balance sheets. Write off all that crap.

So get ready: The countdown to oblivion was paused by “extend and pretend”—but it wasn’t suspended, much less averted. I don’t know if the end will be hyper-inflationary or mega-deflationary… .

We take the roads we drive on for granted, at least until they become filled with potholes. Roads, however, are an interesting early warning sign of a state’s focus and financial condition.

Maintenance of infrastructure is to state governments as important as maintenance of national defense is to the federal government. It is, or at least should be, a primary function. States have taken on many ancillary functions that arguably they should not be involved in. Some have done so at the expense of their primary functions. Why? Maintenance is not as big a vote-getter as building something new.

Roads don’t disintegrate overnight. It takes years of neglect. The condition of roads reflects the conditions of states.  According to Overdrive Magazine, a national trucking publication, the states with the worst roads are as follows:

WORST ROADS

• 1. Pennsylvania
• 2. Michigan
• 3. New York and California (tie)

Not surprisingly, the most “progressive” states (in the sense that they want government involvement way beyond traditional government functions) have the worst roads. There are too many other important items to spend money on than roads. Not surprisingly, these are the states in the deepest financial problems.

According to ConnectMidMichigan.com, state plans will result in even worse roads in the future:

Michigan’s historic disinvestment in the state’s transportation system and inability to increase state investment would cause Michigan’s pavement conditions to drop dramatically from 90 percent “good” on the state trunkline system in 2010, to a low 50 percent by 2020.

I wonder how Michigan’s treatment of infrastructure plays with the companies they are trying to lure into the state.

Infrastructure deterioration is just another sign of government trying to do more than they are able to tax for. Taxes must go up or services of some type must be cut.

Walter Williams

Dr. Walter Williams, professor at George Mason University, asked this question in September of 2000:

“If one group of people prefers government control and management of people’s lives and another prefers liberty and a desire to be left alone, should they be required to fight, antagonize one another, risk bloodshed and loss of life in order to impose their preferences or should they be able to peaceably part company and go their separate ways?”

The question is even more relevant today and Dr. Williams revisits it in a column. Whatever divide existed in 2000 has only widened today. The party in power has a different vision for America than the majority of Americans.

The uneasy schism existed since the founding of the country. Even some of the founders debated these issues. Initially, the schism was small and held in check by a functioning Constitution. Over time, the Constitution has been deprecated by politicians of both parties. Today, it is little more than a quaint artifact of history in the eyes of many politicians.

Many Americans feel strongly that the Constitution should be the controlling document to contain government. As Williams expressed it:

Article I, Section 8 of our Constitution lists the activities for which Congress is authorized to tax and spend. Nowhere on that list is authority for Congress to tax and spend for: prescription drugs, Social Security, public education, farm subsidies, bank and business bailouts, food stamps and other activities that represent roughly two-thirds of the federal budget. Neither is there authority for congressional mandates to the states and people about how they may use their land, the speed at which they can drive, whether a library has wheelchair ramps and the gallons of water used per toilet flush. The list of congressional violations of both the letter and spirit of the Constitution is virtually without end. Our derelict Supreme Court has given Congress sanction to do anything upon which they can muster a majority vote.

The popularity of the Tea Party movement, outpolling either Republicans or Democrats in some recent polls, suggests the severity of the split.

Many Americans believe they are held in disdain by corrupt Washington politicians. They no longer believe that their vote matters. The recent health care “reform” was evidence to reinforce these beliefs. It appears that the politicians in Washington do not believe the people have the power or will to change things. It is likely the November 2010 elections will provide a massive surprise to them and the political talking heads.

In my opinion, we are beyond the point where elections matter very much. Even if there is a wholesale change of seats in 2010, it is unlikely that there will be a wholesale change in the philosophy of government. The Republican philosophy, to the extent it differs from the Democrats, does so mostly in regard to the rate at which they are willing to destroy the country.

If so, then what? Williams states:

Americans who wish to live free have several options. We can submit to those who have constitutional contempt and want to run our lives. We can resist, fight and risk bloodshed and death in an attempt to force America’s tyrants to respect our liberties and human rights. We can seek a peaceful resolution of our irreconcilable differences by separating. Some independence movements, such as our 1776 war with England and our 1861 War Between the States, have been violent, but they need not be. In 1905, Norway seceded from Sweden; Panama seceded from Columbia (1903), and West Virginia from Virginia (1863). Nonetheless, violent secession can lead to great friendships. England is probably our greatest ally.

It is unclear how this plays out, but it is clear that the current situation is unsustainable. Too many Americans still have their sense and love of freedom to just accept deteriorating liberty and standards of living. There can be no stability in the current condition. There will be a solution of some sort.

A version of this appeared on American Thinker today.

The words “conservative” and “liberal” are almost devoid of meaning. That is a reason not to use them. Probably more than half of the time that “liberal” is used, it is used in a pejorative fashion. Hence, those who used to call themselves liberal now use the less unpopular term “progressive.” Likewise, “conservative” is used frequently as a pejorative as well.

The problem with both words is that they have elastic meanings. Each person using the terms has his own definition of what they mean.

Nelson Hultberg discusses the types of conservativism that so-called conservatives have followed. There are many variants. He is particularly harsh on many of them, especially the neo-cons as well as other main strains. His definition of a conservative embodies the following influences and sources:

The American conservative is not antagonistic to “ideology” as Kirk was; he is antagonistic to “irrational” ideology. He grasps full well, with Ludwig von Mises, the power of ideology in the unfolding of history. And he does not shy away from a moral perspective based upon “abstract universal rights” as Edmund Burke’s followers in America have done. The American conservative traces his politics to several sources (Aristotle, Cicero, the natural law philosophers of the Middle Ages, Montesquieu, etc.) but also to Jefferson’s universalization of rights in the Declaration of Independence, for he realizes that such a universalization is the moral validation of America as the ideal political system for all peoples, all cultures, all of time.

Hultberg fears for our descendants if we violate the spirit of our ancestors:

Jeffersonian Conservatism offers us salvation. Its fundamentals of reason, universalized natural rights, and moral idealism are the vital antidotes to reverse the plague of authoritarian statism presently destroying the West. Without its restoration, an alien dark age will curse our children and all those coming after them. Our lives will have been for naught. Surely we as a people have the moral fiber to reject such a fate.

An interesting read from the Daily Bell for those wanting to explore the topic further. Relevant to the concerns raised by many US citizens today.

Bond markets are looking askance on the Federal Government and its continuing profligacy. The belief that the US can continue to finance its current deficits may be questioned. According to Chris Wood writing for Casey Research, Warren Buffet (and other private firms) now borrows at a lower interest rate than Barack Obama: “At the federal level, we can see that the bond market is growing increasingly wary of the government’s spendthrift and “kick the can” attitude.”

Government having to pay more for its debt than private firms goes against accepted beliefs. Economics and finance students are taught that Federal government debt is risk-free. In empirical work, Treasury bill rates are used as a proxy for the “risk-free” rate of interest. How can something that is presumed risky, pay lower interest rates than something that is “risk-free?” It cannot! Treasuries are now starting to be perceived as higher risk than high quality private debt.

I have argued elsewhere that the federal debt problem is intractable and will result in defaults. It appears as though bond markets are starting to recognize this default risk.

It is likely that the risk premium continues to widen on government debt. If so, government spending increases very rapidly as interest rates are forced higher. 40% of government debt is short-term, rolling over within a year. If this is rolled over at much higher interest rates, interest costs for the government expand the already-huge forecasted deficits.

Ultimately this house of cards must collapse. Interest rates might be suggesting that such a change is coming sooner rather than later. Markets, once they have made up their minds, act brutally fast.

Who would you prefer to lend your money to?

Bond Market: “It’s Safer to Lend to Buffett than Obama”

By Chris Wood, Casey Research

A few weeks ago, the Federal Reserve released the new Z.1 Flow of Funds document, which covers flows and outstandings through the fourth quarter of 2009.

What does the document reveal?

You guessed it – more of the same reckless behavior that got us into this mess in the first place. While households and businesses were able to shed debt across the board, increases in local, state, and federal debt outstanding were enough to bring total debt outstanding to a new all-time high, over $34.7 trillion, if you can believe it.

Consider some of the salient statistics from the Z.1 document:

• Total household debt outstanding shrank by an annualized 1.2% in the fourth quarter, while total business debt outstanding declined at a 3.1% annualized clip.

• Combined, total household and business debt outstanding fell to $24.535 trillion, reflecting an annualized decline in the fourth quarter of 2.1%.

• State and local government debt outstanding climbed by an annualized 4.7% in the fourth quarter, while federal government debt outstanding increased at an annualized rate of 12.6%.

• Combined, state, local, and federal government debt outstanding grew to a record-breaking $10.168 trillion, reflecting an annualized increase in the fourth quarter of 10.7%.

So, while consumers and businesses are acting at least somewhat more responsibly, governments at all levels grow more reckless every day. And don’t think this has gone unnoticed by others.

At the federal level, we can see that the bond market is growing increasingly wary of the government’s spendthrift and “kick the can” attitude.

A March 22 article from Bloomberg titled “Obama Pays More Than Buffett as U.S. Risks AAA Rating” reveals that two-year notes sold in February by Warren Buffett’s Berkshire Hathaway yield 3.5 basis points less than Treasuries of similar maturity.

While 3.5 basis points is not a huge amount (100 basis points equals one percentage point), the simple fact that the bond market is saying that it’s safer to lend to Warren Buffett than Barack Obama is telling.

And Buffett is not the only one enjoying this safer than “risk free” rate on his notes. Procter & Gamble Co., Johnson & Johnson, and Lowe’s Cos. debt also traded at lower yields than Treasuries of similar maturity in recent weeks, a situation former Lehman Brothers Holdings Inc. chief fixed-income strategist Jack Malvey called an “exceedingly rare” event in the history of the bond market.

Rare as this situation may be in historical terms, we expect to see lots more of it in the future.

When conventional investments are not the safe haven anymore they used to be, gold is the way to go. Being a traditional inflation hedge, gold’s value has never gone to zero. Learn all about where to buy physical gold and how to store it – plus prudent, gold-related investments that can give you up to 4:1 leverage – by clicking here.

Pamela Gellar wrote the article below on the President. The article is absolutely frightening in that it exposes how devoid of any substance is the man or his “career.” The country has elected a poseur to the highest office in the land. Harvard polish combined with street hustle!

Ted Baxter (Knight)

All politicians are affected to some degree or another. But none have built a career solely on affectation like Obama. In his case, there is no “there” there. No accomplishments, no meaningful work experience, no proof of intellectual ability. Absolutely nothing but great acting skills. In a way, he reminds me of Ted Baxter, the lovable, pretentious but stupid newscaster on the old Mary Tyler Moore show. He could read a teleprompter but was as dumb as dirt when off-air.

Apparently acting came natural to Obama because he seems to have used them early and often. But instead of becoming an afternoon soap opera star, he became President and turned our country into one long, seemingly unending, depressing soap opera.

As Obama said to Reid, “Harry, I have a gift,” referring to his oratorical skills and probably ability to fool others. Unfortunately this country has enough fools to have been conned by this no-nothing thespian.

THE BIGGEST HUSTLE IN HUMAN HISTORY

The media chased down every Bush doc, and when they couldn’t find dirt, they advanced fake docs. That was only the preview. Their masterstroke was creating and advancing a fake president.

This is beyond media corruption; it is criminal.

Big media has a garbage detail to sift through Sarah Palin’s garbage. Why has there been no investigative journalism on this impostor?

The Blogging Professor has the whole dirty, hot mess here:

Chicago Law School faculty hated Obama “because he was lazy, unqualified, never attended any of the faculty meetings, and it was clear that the position was nothing more than a political stepping stool”

The smartest genius President evah is nothing more than a carboard cutout. A fraud. Doesn’t exist. We don’t even know how he did in school because to this day his transcripts are sealed. Turns out now that when he was an instructor at the Chicago, his colleagues who were actual Professors didn’t like him and didn’t want him. Obama’s position was obtained through political channels. From Doug Ross: To be (a lawyer) or not to be…

Is the President’s resume accurate when it comes to his career and qualifications? I can corroborate that Obama’s “teaching career” at Chicago was, to put it kindly, a sham.

I spent some time with the highest tenured faculty member at Chicago Law a few months back, and he did not have many nice things to say about “Barry.” Obama applied for a position as an adjunct and wasn’t even considered. A few weeks later the law school got a phone call from the Board of Trustees telling them to find him an office, put him on the payroll, and give him a class to teach. The Board told him he didn’t have to be a member of the faculty, but they needed to give him a temporary position. He was never a professor and was hardly an adjunct.

The other professors hated him because he was lazy, unqualified, never attended any of the faculty meetings, and it was clear that the position was nothing more than a political stepping stool. According to my professor friend,he had the lowest intellectual capacity in the building. He also doubted whether he was legitimately an editor on the Harvard Law Review, because if he was, he would be the first and only editor of an Ivy League law review to never be published while in school (publication is or was a requirement).

Consider this: 1. President Barack Obama, former editor of the Harvard Law Review, is no longer a “lawyer”. He surrendered his license back in 2008 possibly to escape charges that he “fibbed” on his bar application. …

4. A senior lecturer is one thing. A fully ranked law professor is another. According to theChicago Sun-Times, “Obama did NOT ‘hold the title’ of a University of Chicago law school professor”. Barack Obama was NOT a Constitutional Law professor at the University of Chicago.

5. The University of Chicago released a statement in March, 2008 saying Sen. Barack Obama (D-Ill.) “served as a professor” in the law school, but that is a title Obama, who taught courses there part-time, never held, a spokesman for the school confirmed in 2008.

6. “He did not hold the title of professor of law,” said Marsha Ferziger Nagorsky, an Assistant Dean for Communications and Lecturer in Law at the University of Chicago School of Law.

7. The former Constitutional senior lecturer cited the U.S. Constitution recently during his State of the Union Address. Unfortunately, the quote he cited was from the Declaration of Independence, not the Constitution.

Here was that video that I posted back in January: Video: Former Constitutional Law Professor Obama makes up quotes in SOTU not found in the Constitution:

10. By the way, the promises are not a notion, our founders named them unalienable rights. The document is our Declaration of Independence and it reads: We hold these truths to be self-evident, that all men are created equal,that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

11. And this is the same guy who lectured the Supreme Court moments later in the same speech?

When you are a phony it’s hard to keep facts straight.

For a constitutional senior lecturer, it’s also noteworthy that Obama doesn’t know what car insurance covers.

UPDATE: Doug Ross updates with this: Most Transparent President Ever Has Bar Records Redacted This Week, Leaving Only Traces of His Existence Some Betamax Videos and a Fraternity Pin

President Obama’s Occidental College transcripts have never been released. His Columbia transcripts are, likewise, AWOL. And his Harvard Law transcripts also haven’t been made public. Finally, it’s reported, he never published any articles while at Harvard, yet somehow served as Editor of Law Review. That would make him unique among editors, according to insiders.

Even John “D Student” Kerry was guilt-tripped into releasing his transcripts.

Curiously, since I relayed a report of Obama’s “teaching career” at Chicago (he was apparently never a law professor, as some have claimed), the Illinois Bar has decided to partially redact what little public information it had available on its website related to the President’s legal status.

There’s more.

“Falling wages rates are the consequence of prior bad policies and decisions.” Jerry O’Driscoll

Economic decline can be seen starting as early as three decades ago. The real weekly wage in the US is lower today than it was in 1964 (it crossed below that level in 1977 and has continued to drop). The pain of the decline was covered up by liberal, almost free credit to anyone either upright or breathing. To sustain a living standard that could no longer be paid for, Americans borrowed. Few realized, that while they were living better, it was mostly on other people’s money. When the debt load became too heavy, credit stopped and defaults started.

This economic crisis could easily have come five or ten years earlier or later. The collapse of the stock market in 2000 should have been the corrective crisis. Yet government, in typical kick-the-can-down-the-road fashion decided that a correction should not occur and flooded the housing market with easy credit. As a result, the distortions and mis-allocations that had built up in the economy were not corrected. They were sustained and added to. The latest credit bubble further distorted relative prices as well as absolute ones.

Now we have the current mess, much bigger than the one in 2000. The government is still trying not to face the music by attempting once again to “stimulate” the economy. It probably cannot work this time. Our banks are still filled with toxic assets that are carried at inflated values. Our consumers are forced to rearrange their over-leveraged balance sheets. Many are losing their homes and jobs. Government itself is now insolvent and eventually will crash and burn.

Inflation may raise wages in nominal terms, but not in real terms. Our living standards will decline.

Is there no solution? Economics and common sense provide answers. The burden of government must be dramatically reduced. It must be shrunk back to tasks that it can perform and the private sector cannot. There are very few of these. The percentage of people not working and being supported by the private sector must be reduced. You cannot increase a nation’s standard of living by having fewer people supporting ever-growing numbers of non-workers.

The new health care entitlement has one positive feature. Its first euthanasia patient will be the US government.  As “reform” it is the worst policy that could have been passed. It only hastens the reduction in living standards, reduces future economic growth and further destroys jobs. As such, it hastens the demise of government and the social welfare state.

Economics and common sense could solve our problems, but politics stands in the way. “Starting over” seems to be the only way out. Incremental political change will not work, because it goes in the wrong direction, at least in the political mind. The charade of “fixing” the economy will continue until the economy implodes.

Get ready for a very painful and perhaps dangerous couple of decades.

Below is a simple economic analysis of what is taking place. The reality is that wages are going down and there is little that can be done about that, given our current government-economy mix. Capital formation rather than capital destruction must be encouraged.

Falling Wage Rates

November 12, 2009

by Jerry O’Driscoll

In today’s Wall Street Journal, there is an article titled “Returning Workers Face Steep Pay Cuts.” The article cites research by Kenneth Couch of the University of Connecticut that returning workers are taking on average a 40% pay cut from their old jobs.  This is first and foremost a personal tragedy for those affected.  The question we must ask as economists is why?

Econometricians will still be picking over the data a decade from now. (And of course, they will be looking at revised data, rather than the data we are viewing today. But that is a subject for another post.)  One factor that must not be overlooked is that capital has been destroyed in the prior boom.  The so-called bust or crisis is the revelation of those losses.  Capital is heterogeneous.  The capital embodied in all those unoccupied homes in Las Vegas cannot be deployed to build goods and employ workers in the manufacturing sector.

Many analysts, myself included, argue that economic recovery will involve a switch to a lower consumption path.  In the process, proportionately more resources will be devoted to production of goods for rest of the world.  New savings will be needed to finance that transition.  But much accumulated savings have been lost due to capital misallocation. In order to be competitive in the global economy, the U.S. must become a country of lower wages. And we are witnessing that painful adjustment in real time.

The reflationists (whether monetary or fiscal) conflate cause and effect.  Falling wages rates are the consequence of prior bad policies and decisions.  They are not the cause of current problems.  Moreover, fiscal and monetary stimulus cannot restore the lost capital.  Printing money or redistributing income does not create real wealth.

Falling real wages and declining living standards put flesh on the skeleton of macroeconomic policy debates.  They are the real-world consequences of bad macroeconomic policy: easy money, politically directed investment and regulatory capture.  All those bad policies are being continued or enhanced.  Only further misery will flow from them.