Keynesian “stimulus” has failed to do anything but prop up the Status Quo. If we want to create jobs, we need to clean the house of impaired debt and lower the cost structure of the entire economy.

Politicos across the spectrum and cargo-cult Keynesians are  constantly bleating about “creating jobs.” You really want to  create jobs instead of just  helplessly  wringing your soft little hands? Here’s how:

1. The only engine for jobs is small business, so quit pandering to global corporations and start pandering to the people who might actually hire someone in America. The back-of-the-envelope number bandied about is that small business creates about 60% of the new jobs in the U.S. I suspect that’s a number from a decade or two ago; in the real world of the present, it’s more like 90%.

As noted here many times before, Global Corporate America is a profit machine with no loyalty to the nation or its workforce. It only has one prime directive: deploy capital and labor wherever it reaps the most profit and the quickest return. That’s it.  Everything else is political propaganda and PR.

This is not a judgment, it is a statement of fact.  As capital is allowed to flow freely, then it seeks the highest return and the lowest labor costs. Once global supply chains are in place, then that place is rarely America.

Why? Because the U.S. economy has a high cost structure for small business that’s getting higher while yielding diminishing returns. Rents are high, thanks to the real estate bubble, taxes for small business are high, healthcare costs are double that of our developed-world competitors–the list goes on. America is not an efficient place to do business; you pay high costs and taxes (if you’re a small business or self-employed), and don’t get much in return.

It’s a great place to be a global corporation or billionaire, because they can buy special favors that exempt them from the same burdens imposed on small business.

The U.S. economy is hobbled by two systemic burdens: sickcare and the insolvent “too big to fail” banking system. Both act as enormous taxes on the productive citizenry.

You want to create jobs? Then stop diddling around with cargo-cult Keynesian “stimulus” which just props up the least efficient and most parasitic elements of the economy: the banking sector, Wall Street, cartels and fiefdoms.Keynesian stimulus is simply another facet of the Wall Street/bank/corporatocracy Status Quo: we’ve already squandered trillions in “stimulus” government spending, and very little has trickled down to the businesses which might actually hire  someone in the U.S. It is a failed policy precisely because it is entirely Status Quo.

If we really want to create jobs, we need deep structural reforms. Rearranging the deck chairs on the Titanic–i.e. trimming the payroll tax 2%–is meaningless.Here’s the to-do list for those who are serious about creating jobs:

1. Write off $3 trillion in underwater mortgages, $1 trillion in impaired student loan and consumer debt, and $1 trillion in doomed commercial real estate loans.Here’s the core fact: those debts will never be paid back; they’re already lost.  Keeping them in a zombie state cripple the borrowers and the economy. The 10 million mortgages which are deeply underwater are not coming back; they’re gone, let’s accept it and  set the stage for real growth. This writedown will have several salutary consequences:

A. It will wipe out the 6 “too big to fail” banks which are acting as a dead weight on the economy and on its political governance. It’s too bad the Keynesians are too busy painting radio dials on rocks and chanting tired incantations to realize that the only step that will make a difference in jobs is destroying the “too big to fail” banks, and thus destroying their grip on the nation’s throat.

Replace them with 50 smaller banks which are precluded from buying each other–or 250 banks.  Re-enact Glass-Steagal to separate depository and investment banks–recall the bill was less than 10 pages long. Once the TBTF banks are gone, there won’t be enough  concentrated wealth and capital to so easily subvert the political system.

B. By wiping out doomed home mortgages, you free up workers who were immobilized and unable to move to where jobs are being created. Labor mobility  is absolutely critical, so those with the right skills can move to where the skills are needed; underwater mortgages trap potential employees in dead-ends.

C. Wiping out the debt via auctioning off 10 million homes would drop prices and lower the cost structure of housing across the board. The critical destructive event of the past decade was making housing a speculative playground.  That jacked up costs and left underwater owners and lenders fighting to keep prices propped up. That is a hopeless exercise, another “hidden tax” on the economy.

Writing off debt that will never be collected cleans the slate and lowers the cost structure. Once housing returns to its historical levels of valuation, a lower salary will still be enough to buy a house.

In other words, propping up housing to “save” the banks has helped render America uncompetitive on the global marketplace. Historically, a house should cost no more than two years of the median salary in the area.

2. Reduce healthcare/sickcare costs by a third, from 17% of the nation’s gross domestic product (GDP) to 11%–then reduce it again to the level of Australian and Japan healthcare costs, around 8% of GDP.Sickcare is truly pernicious, as it acts as an 8% “useless tax” on the economy: if our developed-economy competitors can provide healthcare to all their citizens for literally half of what we spend per capita, then  we are instantly uncompetitive just as a result of sickcare.

As I have endlessly explained here, “healthcare” in the U.S. is nothing but an enormously profitable assembly of cartels. It is truly sickcare, because in a  profit-based system, health is profitless and therefore the enemy of profit: it’s illness that’s profitable, so the sicker the populace, the better.

That’s why 50% of our healthcare costs are expended on 5% of the people. They’re where the money is to be made. Diabesity is immensely profitable; low-BMI healthy people are uselessly profitless. Illness is highly profitable, health is unprofitable.

I have covered this many times, and I don’t have time to repeat it all. Please enter “sickcare” into the Google custom search bar in the upper left sidebar, and you can find all the source material you want.

If you read the history of healthcare, it seems more an historical accident than some well-thought-out plan that employers were saddled with providing healthcare insurance for their employees. This was workable when healthcare was 1% or less of a workers compensation, but now that it’s 50%, and millions of people work part-time or are contract workers, it no longer works on a systemic level. There is nothing written in stone about this system, and in a “freelance nation” it no longer makes sense.

I have often written about healthcare, and what it all boils down to is this:either the system shrinks in a chaotic collapse, or we deal with reality and shrink it via a complete redesign. It’s going to implode if the current course is maintained, and then we’ll have nothing but shambles. Is that really preferable to grasping the nettle and redesigning the system from the ground up? Isn’t America supposed to embrace innovation? Or is that just PR for selling a new electronic toy?

Scrape away the propaganda spewed by cartels and their think-tank toadies, and the bottom line is that there are only two large-scale healthcare systems which are efficient in the U.S.: the Veterans Administration and cash. To understand why this is so, we need to realize the staggeringly negative consequences of not having a nationally mandated “best practices” for care that is also strictly cost-conscious.

Without a coherent, rational, cost-conscious set of national “best practices” guidelines, doctors and their employers are open to claims of wrongful care, inadequate care, etc. This lack of national standards creates wasteful “defensive medicine” on a vast scale. This site has many readers within the medical profession, and I could relate many horror stories of the perverse incentives created by the current sickcare system.

I am not an expert on the VA, but it seems to have a national set of “best practices” which are applied at all VA facilities around the nation.  There are limits on care–there has to be. That is simply reality. I knew an older internal medicine doctor in my 20s and 30s, and he often had very ill patients with multiple conditions and diseases. At this stage of illness and life, there is very little anyone can do to restore the health of a very ill person. “Heroic measures” undertaken to stave off lawsuits just throw away money and place additional burdens on the family and the patient.

Why is it so difficult for us to recognize these simple realities? One reason is the system rewards “heroic measures” (highly profitable) and lawsuits (potentially profitable, so “fishing expeditions” are encouraged) if they’re not undertaken.

The VA is the only truly innovative healthcare provider in the nation. I don’t have  time here to explain why, so do your own research on national computer systems in healthcare. The VA is owned lock, stock and barrel by the Federal government, and while it has its problems like any vast bureaucracy, nobody is claiming that it is corrupt. We seem to have forgotten that corruption comes with concentrations of wealth and political power which forms partnerships of cartels and Central State fiefdoms. If there is no profit, then the motivation for corruption falters.

How corrupt is NASA or the VA?  Are they really like the banking sector? The answer is no.

Here’s the key feature of the VA system: doctors get to be doctors, not gate-keepers or profit-skimmers. Doctors don’t own the labs that do the tests they order, and when somebody sues them, the doctors are backed up by a regiment of government lawyers. Doctors  don’t have to lay awake at night worrying about getting sued or making their malpractice payment.

The common-sense solution to cut healthcare costs in half is a dual system: a VA-like system with universal access but strict cost controls and no profit, and cash: buy whatever care you want, from whomever you want. Don’t like the VA system? Fine, save your cash and buy whatever care you want, no restrictions. Don’t want to work for the VA system? Fine–get your license to practice medicine and set up shop, cash only.

This would not be a painless transition; after all, the cartel-Medicare/Medicaid complex has been on a hiring spree ever since the cartels realized there was literally no limit to how much they could bill the government. (Recall that 40% of our sickcare costs are paper-shuffling, embezzlement and fraud. That’s what’s incentivized, so  that’s what blossoms.)

But the reality is that cutting sickcare in half would restore it from a “profit center” to actual healthcare in the hands of primary-care physicians.

The ultimate answer to improving healthcare is community-based healthcare. As long as isolated “consumers” have few incentives or local options for improving their own health with their peers and primary-care physicians and nurses, then improving health is fighting the headwinds of marketed illness via junk food and techno-entertainment inactivity.

If you don’t like these solutions, then come up with your own, but they have to cut U.S. healthcare spending per capita in half. Nothing less will create a competitive economy.

Lest you think this alarmist, the Establishment journal Foreign Affairsreached the same conclusion: How Health Care Can Save or Sink America.

It’s easy to predict what will happen is we do nothing; in a few years, Medicare will exist in name, but there won’t be anyone left to provide care for IOUs. That’s the ultimate irony: when the whole system implodes, the only thing left will be the VA and cash care: the two systems I am recommending as solutions.

3. State and local government “one-stop” permits and oversight for new business.Those outside small business have no understanding of the roadblocks, the junk fees, and the madness-inducing pettiness of competing government bureaucracies, the vast majority of which take no risks and whose employees view small business as the enemy or as  tax donkeys upon which they can heap abuse without any fear of retribution. The general mindset of government from the point of view of struggling small business can be summed up in one word: Extortion.

If you think this harsh, please go out and try starting a business from scratch and hire 10 people to work for you. Was the experience enjoyable, low-cost, risk-free and seamless?

The truth is that government workers trying to do a good job of regulation and oversight are just as frustrated as small business: the current system’s tangle of self-serving fiefdoms makes it almost impossible for government workers to do their jobs well.

Regulation and oversight are like vitamins: if you don’t have any, the economy suffers, but having too much is deadly, too.

I know one growing suburban community that has been trying to get a new train station on an  existing rail line for over ten years. The number of agencies and monopolies which can inhibit or block every step of the process is somewhere between 10 and 13. If you think this tangle of competing jurisictions and bureaucratic bloat offers great value to the nation, I invite you to compare efficient nations with low unemployment and bloated banana republics with high unemployment and crony Capitalism.

The latter take 10 years to approve a new commuter train station.–or maybe 15 years, or never. This is the acme of a broken system.

Yes, the issues are complex. But does stretching the decision process out for 10 years add value?  Couldn’t a decision be reached in two months, if there was any incentive and pressure to do so? Yes or no, proceed or do something else: we have lost the ability to incentivize speed and efficiency in government, and this has crippled the economy being regulated.

If the nation is serious about encouraging new businesses, then government has to strip away the inefficiency and bloat which inhibit growth for essentially zero payoff.   Permits are important, and oversight is important; but it is merely common-sense that these functions be centralized and speeded up to foster “best practices” without  stultifying new businesses.

Government employees who want to do their jobs efficiently and productively  would be delighted to work for a stripped down, centralized agency which was designed to approve or disapprove projects quickly, and regulate the economy like vitamins–enough for safety, but not too much, i.e. a self-serving fiefdom.

It’s that simple: lower the cost structure of the economy, and remove the impediments to starting new businesses and hiring workers. For more on these topics:

Unemployment: The Gathering Storm (September 26, 2009)

Here’s Why Small Business Isn’t Hiring, and Won’t be Hiring (July 11, 2011)

Seven Headwinds for the U.S. Economy (August 4, 2010)

Of Two Minds

“I believe we no longer have free market capitalism and we no longer have a democracy,” says David Stockman, the blunt-talking former Michigan Congressman and Director of the OMB during the Reagan administration.

What now exists at the heart of the U.S. economy, Stockman argues, is “crony capitalism” – a system that benefits and even rigs the system in favor of America’s banks and bankers at the cost of average Americans. It’s a system built on the back of government-issued bailouts and free money. “The Fed is the great enabler” through its free money policies, which “generate results the market wouldn’t otherwise provide for,” he says.

For example, banks – which caused the 2008 economic and financial crisis – are enjoying profits once again as so-called “risk assets” reflate. Meanwhile, well-meaning members of the middle class intent on saving cash continue to get “savaged” (Stockman’s word) when they keep money in low-yielding savings accounts and rely on a dollar that continues to lose value.

When Bernanke & Co. allow banks to borrow money at no cost for so long it turns “capital markets into a rip-roaring casino that really is not productive for the real main street economy and is generating windfall gains for to a very limited number of people for no good purpose,” Stockman tells Dan Gross in the accompanying interview.

These policies are nothing new, Stockman says, but “crony capitalism” hit new levels of absurdity in the recent past with the bank bailouts and the auto bailouts.

How do we get back on track?

According to Stockman, the Fed should raise rates immediately and end the possibility of more bailouts.

Is he right?

Tech Ticker

The facsimile of U.S. “growth” now depends entirely on Central State manipulation and stimulus of risk trades and financial slight-of-hand.

The U.S. economy has become increasingly dependent on asset bubbles, financial legerdemain, credit expansion, Federal borrowing and the manipulation of risk trades to maintain the illusion of “growth.” Compared to an economy based on organic demand and productive growth, the current U.S. economy is a travesty of a mockery of a sham, and has been since 2001.

There are a number of factors at work, but let’s start with two: the ratchet effect, and the Keynesian Project.

In the ratchet effect, increases are easy and resistance-free: it’s incredibly easy to hire more employees in bureaucracies, for example. But once the ratchet has advanced, it is nearly impossible to return to the previous tooth in the gear.

So for a city government to expand payroll from 10,000 to 20,000 employees was effortless, to reduce a 20,000 person payroll back to 10,000 is exceedingly painful.

The ratchet effect is a key feature of addiction. When one beer no longer creates a “buzz,” then the consumer drinks two, and so on, until a six-pack is the new baseline. Below that level of consumption, the addict gets panicky, for the entire necessity of creating a buzz is at risk of catastrophic failure.

The U.S. economy is now addicted via the ratchet effect to unprecedented levels of Federal borrowing and Federal Reserve credit creation and manipulation. Let’s set aside the fact that America’s Central State has by some calculations guaranteed some $13 trillion in private financial assets via TARP, AIG’s backstop, the takeover of Fannie Mae and Freddie Mac, etc.–roughly the size of the entire GDP of the nation.

Let’s focus instead on the fact that the Federal government must borrow and spend 11% of GDP ($1.5+ trillion) every year, and the Fed must buy $1 trillion in impaired private assets or new Treasury debt annually (another 7% of GDP) just to create an illusory GDP growth of 2.5% a year. So we’re spending/injecting 18% of the GDP to conjure a “growth” of 2.5%.

That means we’re spending/injecting $7 to create $1 of “growth” in GDP. And thanks to the ratchet effect, there’s no going back now without systemic disruption. Does anyone seriously believe spending $7 to birth $1 of “growth” is sustainable? If so, then let’s eliminate that $1.5 trillion deficit spending and the Fed’s $1 trillion-a-year purchases of impaired debt and Treasury bonds, and see if GDP “grows” via organic demand and production.

Everybody knows what would happen: the wheels would fall off the illusory “recovery.” The “recovery” is precisely analogous to an alcoholic who claims to be sobering up but who is actually drinking seven beers a day to get a buzz when a few years ago he only quaffed two or three a day.

Here is the Keynesian Project in a nutshell. Unfettered Capitalism works in straightforward cycles: the organic business cycle of expansion, overcapacity and overleverege inevitably leads to a credit bust in which those whose borrowing exceeds their ability to service their debt go broke, and the dominoes of overcapacity and credit expansion topple as losses mount and consumption based on increasing debt falls.

Bad debt gets wiped out, along with “pyramid-scheme” type assets (mortgaged assets are leveraged to buy more mortgaged assets) and excess capacity. As production declines, workers are laid off and consumption declines, further pressuring impaired financial assets.

As Marx had foreseen, these cycles increase in depth and severity. Though Marx invoked dialectical theory and history rather than the ratchet effect, the basic idea is the same: Capitalism becomes increasingly dependent on financial capital, and the resultant crises eventually become severe enough to take down Capitalism as a sustainable productive system.

Keynes’ proposed to counter these worsening business cycle implosions with massive injections of Central State borrowing and spending. The atmosphere of fear as assets, credit and consumption all contracted would be replaced by a revival of “animal spirits” (the magical elixir of Capitalism), consumption would be stimulated by direct government spending on capital projects and welfare (fiscal stimulus), and banking credit would be restored via stimulative Central Bank credit expansion (monetary stimulus).

But Keynes failed to grasp what Marx had intuited: the ratchet effect. Once the Central State ramped up deficit spending and expansive credit, then the organic economy became dependent on that new level of Central State spending and credit expansion.

As I described in the Survival+ analysis, in effect the central State rescued Monopoly Capital by partnering with it. This results in a financial/State Plutocracy which “saves” the organic economy by taking control of its income streams, credit creation and financial assets.

That is the U.S. economy in a nutshell: a travesty of a mockery of a sham. The consumer became dependent on easy, cheap credit and home equity extraction to maintain his/her consumption. The student became dependent on easy, cheap credit to fund his/her increasingly costly college education. Monopoly capital became dependent on financial slight-of-hand, the debauchery of credit, fraudulent mispricing/masking of risk, stupendously leveraged bets on risk assets, etc. for its swollen profits. Politicans became dependent on unlimited borrowing and spending to keep the illusions of competence, sustainability and “growth” alive.

State and local governments became casinos, dependent on skimming the profits from asset bubbles and financial fraud. Where did New York City’s and New York State’s rising revenues come from? By playing dealer on Wall Street’s scam tables, skimming a steady share of the profits.

Where did California’s bloated state revenues come from? The skimming of capital gains from the Ponzi-scheme real estate bubble.

The stock market rally circa 2003-2008 was merely Travesty of a Mockery of a Sham Phase I. In those glory years of the Central State/Cartel-Capital manipulation, it only required $2 of stimulus and credit expansion to blow $1 in asset bubble “growth.”

But alas, the growth was bogus, illusory, a simulacrum of organic growth, a house of credit cards and fraud that toppled when one card’s overleveraged precariousness was inadvertently exposed.

Now we are in Travesty of a Mockery of a Sham Phase II. As Marx had foreseen, the crises are ratcheting up: now it’s taking $7 of State/Plutocracy intervention to conjure up a pathetic $1 in “growth.” Both are now totally dependent on the substitution of bubbles and fraud for real productive growth.

What Marx failed to foresee was the Central State’s rescue of Cartel-Capital via a partnership: the Central State is now as dependent on financial capital’s maximization of fraud and credit expansion as the Financial Plutocracy is dependent on the Central State to mask and enable its expansion of income and control.

The problem is, of course, that the system cannot support borrowing and spending $7 to create $1 of “growth” for long: eventually, as in all business cycles, the cost of borrowing will exceed the ability of the borrower to service that debt. That’s what Keynes failed to foresee: the way in which the partnership of Central State and Cartel-Capital requires ever greater credit and State debt expansion just to keep the system afloat, never mind growing.

If I loan you $1 trillion at zero interest, with no principal payments, then the cost of servicing that $1 trillion loan is zero. Pretty easy to service zero, isn’t it? That’s the core strategy of the Federal Reserve and the U.S. Treasury.

That’s been Japan’s “secret” for 20 years: as long as the lenders (the Japanese citizenry and life insurance companies, etc.) accepted near-zero interest, then the cost of borrowing additional trillions has been bearable.

But as soon as that $1 trillion requires a serious interest payment, then the ratchet-effect game ends. We are not there yet, but the endgame is no longer over the horizon.

What will TMS Phase III require? $10 in Central State stimulus for $1 in nominal GDP “growth”? Or will it be $20 for every $1 of bogus “growth”?

The stock market is a reflection of this ratcheting up of Central State/Monopoly Capital intervention and manipulation. The stock market took off in the mid-1990s in the “easy money” era, and that led to the Phase I bust of 2000-2001.

That required TMS Phase II, which led to the next asset bubble in 2007-08, and that orgy of fraud and credit/leverage expansion led to an even more severe Phase II bust 2008-09.

If the partnership attempts Travesty of a Mockery of a Sham Phase III, then the consequent bust should return the stock market to pre-Phase I levels: The Dow around 4,000 and the SPX around 400.

Neither the public nor the Standard-Issue Punditry (SIP) understand the addiction-like dynamics of the Central State/Cartel-Capital partnership’s increasingly ineffective interventions on behalf of a facsimile of normalcy and “growth.” Like the addicted junkie, the Central State/Cartel-Capital partnership is approaching the point where their “high” requires ever higher doses of smack.

Nobody knows when the higher doses finally become lethal, but we do know there is such a point.

Live debate on deflation/hyperinflation, February 10, 9 p.m. EST . Most of you are already familiar with bloggers Stoneleigh of The Automatic Earth and Gonzolo Lira. Both are well-informed, articulate and persuasive, so the exchange on a topic of importance to us all (deflation vs. hyperinflation) is sure to be compelling.

Of Two Minds

A Center for Freedom and Prosperity Foundation “Economics 101″ Video Exposes Keynesian Consumer Spending Fallacy.

“Keynesian stimulus schemes failed under Bush and now they are failing under Obama” said CF&P Foundation President Andrew Quinlan. “This new video hopefully will prevent similar mistakes in the future by helping people understand the importance of growth rather than redistribution.”

“Keynesian policy is based on the fallacy that you can become richer by taking money out of one pocket and putting it another pocket, but this is a zero-sum game that appeals to statists and other redistributionists,” added Dan Mitchell of the Cato Institute. “Real economic growth occurs when we figure out ways to increase national income, which is why good policy means reducing the burden of government.”

Video Summary

Politicians and journalists who fixate on consumer spending are putting the cart before the horse. Consumer spending generally is a consequence of growth, not the cause of growth. This Center for Freedom and Prosperity video helps explain how to achieve more prosperity by looking at the differences between gross domestic product and gross domestic income.

This new video is part of CF&P’s Economics 101 video series, which is designed to explain free market concepts, with particular emphasis on reaching students and young people. This is the tenth video in the series.

Other Econ 101 Videos

• Indexing the Capital Gains Tax to Protect Taxpayers from Inflation,
• Repealing Obamacare and Restoring a Free Market in Healthcare,
• The Job-Killing Impact of Minimum Wage Laws;
• Deficits, Debts and Unfunded Liabilities;
• Cost of the Internal Revenue Code;
• Lessons Learned From Sweden; Government Monopolies; Moral Hazard;
• Don’t Copy Europe’s Mistakes.

Mini-Documentaries

• Tax Competition Primer,
• VAT-Hidden Tax,
• Global Flat Tax Revolution,
• Cutting the U.S. Corporate Income Tax,
• Promoting Prosperity,
• Obama’s So-Called Stimulus,
• Obama’s Deferral Proposal,
• Case Against Class-Warfare Tax Policy,
• President Obama’s Dishonest Demagoguery on Tax Havens,
• Six Reasons Why the Capital Gains Tax Should Be Abolished,
• Benefits of Tax Havens
• Laffer Curve.

Inquiring minds will want to check out some of those videos.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Some top Federal Reserve officials have come up with a really bizarre proposal for stimulating the U.S. economy.  As unbelievable as it sounds, what they actually propose to do is to purposely raise the rate of inflation so that Americans will stop saving so much money and will start spending wildly again.  The idea behind it is that if inflation rises a couple of percentage points, but consumers are only earning half a percent (or less) on their savings accounts, then there will be an incentive for consumers to spend that money as the value of it deteriorates sitting in the bank.  Yes, that is how bizarre things have gotten.  It is not as if U.S. consumers are even saving that much money.  Several decades ago, Americans typically saved between 8 and 12 percent of their incomes, but over this past decade the personal saving rate got down near zero a number of times as Americans were living far beyond their means.  Once the recession hit, Americans very wisely started saving more money, and so now the personal saving rate has been hovering around the 5 to 7 percent range.  This is well below historical levels, but the folks at the Fed apparently are eager for Americans to pull that money out and start spending it again.

In an article entitled ”Fed Officials Mull Inflation as a Fix“, Wall Street Journal columnist Sudeep Reddy described this bizarre new economic approach that some over at the Federal Reserve are now advocating….   

“But as the U.S. economy struggles and flirts with the prospect of deflation, some central bank officials are publicly broaching a controversial idea: lifting inflation above the Fed’s informal target.”

Does increasing inflation as a way to stimulate the economy sound like a good idea to any of you?

These are supposed to be some of the brightest economic minds that our nation has produced.

Unfortunately, it is becoming increasingly apparent that the folks running the Federal Reserve do not have a clue about sound economic policy.

Anyone who lived through the “stagflation” days of the 1970s should know that inflation does not spur economic growth.

But now some of the most prominent Fed officials are publicly proposing that we should purposely generate more inflation so that “real interest rates” (interest rates with inflation factored in) will go down.

For example, during a recent interview the president of the Federal Reserve Bank of Chicago, Charles Evans, made the following statement….

“It seems to me if we could somehow get lower real interest rates so that the amount of excess savings that is taking place relative to investment needs is lowered, that would be one channel for stimulating the economy.”

If you truly grasp what Evans is proposing here, your jaw should be dropping.

He is basically coming right out and saying, “Hey, let’s go out and crank up the inflation rate so that American consumers will start recklessly spending their money again.”

So are Americans really saving too much money?

Of course not.

Just take a look at the chart below.

Americans are actually still saving far, far less than they used to.  As you can see from the chart, in the 1960s and 1970s Americans would usually save somewhere between 8 to 12 percent of their incomes.

Today, we are still well below that level.  But we have made some progress from the reckless days of five to ten years ago when Americans were living far, far, far beyond their means and basically saving next to nothing….

So now some top Fed officials want to undo all that.  They apparently want Americans to grab their credit cards and to run out to the stores and spend wildly like they did a few years ago.

But spending recklessly is not going to repair our economy.  In order to have a healthy, balanced economy you need to have a healthy personal saving rate.  Encouraging Americans to spend every last nickel they have may boost economic figures in the short-term, but it will make our long-term problems even worse.

But it is not just Federal Reserve officials that are advocating this kind of nonsense.  Just a few months ago, IMF chief economist Olivier Blanchard suggested that it might be a good thing if western nations doubled their inflation targets from two percent to four percent. 

It seems like almost everyone is in an inflationary mood these days.

The Federal Reserve keep dropping hints that it is ready to print lots more money and unleash another huge round of quantitative easing.

Just this past week, the Bank of Japan shocked world financial markets by cutting interest rates even closer to zero and by setting up a 5 trillion yen quantitative easing fund.

In fact, nations all over the world have become increasingly eager to devalue their national currencies in an attempt to gain an edge in international trade.

So after years of relatively low inflation, it looks like our leaders are almost eager to tangle with the inflation tiger once again.

But it might not be so easy to tame the next time.

Once a really bad inflation spiral gets going it is really hard to stop.

But in the end, it is not going to be Barack Obama or the U.S. Congress that is going to decide if we pursue these inflationary policies or not. 

Ultimately, these decisions are in the hands of the unelected, unaccountable Federal Reserve.

If you don’t like it, too bad.  When was the last time a U.S. president or the U.S. Congress really stood up to the Federal Reserve?  It just doesn’t seem to happen.

The Federal Reserve is going to do what the Federal Reserve wants to do, and the rest of us are going to have to live with it.

Of course we could all try to elect candidates who would demand more accountability from the Federal Reserve this fall, but unfortunately those kind of candidates are few and far between.

The sad reality is that at this point, the Federal Reserve is pretty much completely and totally out of control.  The U.S. dollar has already lost over 95 percent of its value since 1913, and now the Federal Reserve is giving every indication that inflation is going to get even worse in the years to come.

But flooding the system with more paper money is not going to solve anything.  Instead, it is just going to make it even harder for average American families to buy milk and bread and to put gas in the car.

Inflation is a hidden tax on every single dollar that we already own.  It is a destroyer of wealth and a wrecker of currencies. 

But now some of the top officials at the Fed see inflation as a key tool in creating “economic growth”. 

With such a clueless collection of idiots running our economy (and the Federal Reserve does run our economy) do any of you actually believe that there is hope for the U.S. economic system in the long run?

The Economic Collapse

By Fred Douglass

Submitted by Tyler Durden

As we speculated previously, the sudden and unprecedented departure of Peter Orszag, the day prior to the US Budget’s formalization (which incidentally never happened as now the US will likely not have a 2010 budget at all, for fear of disclosing to most Americans just how broke the country is ahead of mid-terms) was due to Orszag’s disagreement with the administration’s, and particularly Larry Summer’s, inability to fathom that reckless spending is a recipe for bankruptcy. As the FT reports: “Peter Orszag, Barack Obama’s budget director, resigned this week partly in frustration over his lack of success in persuading the Obama administration to tackle the fiscal deficit more aggressively, according to sources inside and outside the White House.” And so, as any remaining voices of reason realize they are dealing with a group of deranged Keynesians, soon there will be nobody left in the administration who dares to oppose the destructive course upon which this country has so resolutely embarked, which ends in one of two ways: debt repudiation, or war. And with the only remaining economic “advisers” being the trio of Summers, Romer and Geithner, you know America will somehow hit both of these mutually exclusive targets.

More from FT:

Mr Orszag, whose publicly stated reasons for leaving were that he was exhausted after years in high pressure jobs and also that he wanted to plan for his wedding in September, is seen as the guardian of fiscal conservatism within the White House.

Other members of Mr Obama’s economic team, notably Lawrence Summers, the head of the National Economic Council, have placed more emphasis on the need for continued short-term spending increases to counteract what increasingly looks like an anaemic economic recovery in the US.

Although Mr Orszag agrees with the need to push short-term spending, particularly in the Senate, which again this week failed to pass a measure extending insurance to the unemployed, the budget director has become increasingly frustrated with the administration’s caution on longer-term fiscal restraint.

Mr Orszag, whom Mr Obama has dubbed a “propeller-head” because of his brilliant facility with projections and spreadsheets, has tried but failed to convince his colleagues to “step up the action”, according to one insider.

In particular, he has collided with the political team, led by Rahm Emanuel, Mr Obama’s chief of staff, over Mr Obama’s 2008 election pledge not to raise taxes on any households earning less than $250,000 a year – a category that covers more than 98 per cent of Americans.

Economists say that would put all the fiscal emphasis on draconian – and highly unrealistic – spending cuts, or else pushing the marginal tax rates on the very rich to confiscatory levels. “Peter feels strongly that this is a pledge that has to be broken if the President is to take a lead on America’s fiscal crisis,” says an administration official not authorised to speak on the matter.

And after Barney Franks’s disastrous appearance earlier on, where the market did a shot and an uptick for every lie uttered, we can safely say that this bankrupt country truly deserves all of its elected individuals.

ZeroHedge

By Karl Denninger

Financial Jenga

During the current economic crisis, most of the major countries have tried to spend their way out – either with government programs funded with new debt or by forcing debt directly into the private economy through guarantees, regulations and action by quasi-government bodies. We discussed the implications for China in Command and Control and for the US in The Federal Funhouse. These initiatives were based on Keynesian economic theory – that government should make up for any shortfall in private demand by spending (likely
incurring deficits) sufficient to stabilize aggregate demand.

This is a temporary band aid at best and the governments and central banks were hoping to buy time and convince everyone that things were OK so they should go out and spend. This was doomed to fail as prior private demand was based on nearly universal lending at suicidal risk levels. One of the key objectives of Financial Jenga was to document the extent of the madness in credit. Enough people have seen through the wishful thinking so that there will be greater caution on the part of both borrowers and lenders for the foreseeable future.

The massive deficits that various governments have run can only be sustained as long as there are lenders out there willing to finance them. Several bond auctions have failed or nearly failed in the last several weeks. Now we see the appetite for debt drying up and some key nations beginning to talk about austerity. A good example is this statement from the G-20 Meeting Communique:

The recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, growth-friendly measures, to deliver fiscal sustainability, differentiated for and tailored to national circumstances… We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions.

Clearly, the finance ministers are signaling a new mood of fiscal responsibility here – in sharp contrast to the “stimulus” measures that have previously reigned. This change in emphasis is further reinforced by the recent statements from two key European governments. From the UK we have (Prime Minister) “Cameron warns of painful cuts to tackle debt” as a headline. In Germany, Chancellor Merkel is cutting the budget by nearly $100 billion according to Bloomberg. This is not only a sharp contrast with the Keynesian program here in the US, it is a direct slap in the face of Tim Geithner at Treasury and the entire Obama Administration:

German Chancellor Angela Merkel’s Cabinet approved levies on banks, air travel and nuclear-power plants as part of what she called an “unprecedented” round of budget cuts, rejecting U.S. calls to spur growth.

Bux Populi

Austerity is the new watchword and it is showing up first in places where governments either have their backs to the wall or are less under the influence of the banks. Yet even here in the US, where we have the best government the bankers’ money can buy, things are starting to change. Actual voters concerned about the rapidly growing deficit seem to be a stumbling block to Congressional spending with less than 6 months until the elections. Web-based My Way News reports:

Obama’s proposed $250 bonus payment to Social Security recipients was killed by the Senate. Also gone is an $80 billion-plus Senate plan that promised money to build roads and schools, help local governments keep teachers on the payroll and stimulate hiring in the home improvement industry with rebates for homeowners who make energy-saving investments.

Just last month, deficit concerns killed $24 billion in fiscal relief to prevent state workers from being furloughed. It was a measure that earlier had won initial votes in both the House and Senate.

The battle over extending jobless benefits for up to 99 weeks for the long-term unemployed typifies how the Democrats’ jobs agenda has foundered. What originally was a $200 billion measure combining the jobless benefits with renewing popular business and family tax breaks was cut to $115 billion by House leaders after moderate Democrats who are particularly vulnerable in November refused to support it.

The Federal Government has been able to finance large deficits so far. Partially this results from capital flight as Europe’s problems become more apparent. Part of the equation is an increased preference for Treasury bonds over stocks and lower-grade private bonds. Finally, there is the large-scale purchases of MBS by the Fed, which has indirectly funded Treasury auctions by putting more money into the hands of bond buyers and Primary Dealers. Despite a very favorable environment for Treasury bond demand, huge issuance pushed yields upward until the recent resurgence of Europe’s problems.

The difficulty financing our debt led the Obama Administration to float several proposals for major tax increases in an effort to convince bond buyers that there would be enough tax revenue to support the debt. This included a VAT. Notice how little we have heard about that and other taxes since the Euro crisis made the dollar and Treasuries the only game in town. Even so, the easy period of debt finance is coming to an end – even for the US government. Washington had best not expect to fund large deficits easily into the indefinite future.

A lot of bankers have to be asking themselves a question. If governments are cutting back, who is going to bail me out?