Part 2 -- Bricks Without Straw? Or, More Straw Chasing Fewer Bricks?

See Part 1 -- "Pyramids in Argentina"

Currently America is in the midst of a downward economic spiral.  Some compare it to Japan’s Lost Decade of the ‘90’s.  Japan did not, during that time, descend into unrest and violence.  Yet Japan’s unemployment rate never rose above 5.5%, although that was from an average well under 3%, so unemployment doubled, much as the United State’s rate has done.  The question is, will Americans quietly endure a slow recovery as the Japanese did, or will we become more like Argentina? 

The United States could have a relatively rapid recovery if the Federal government were wise enough to cut spending drastically, free up private capital through tax cuts, and get government debt under control.  Unfortunately our government is being run by academics and theorists or thugs and con artists most of whom never had a real job or worked in the private sector.  They consider themselves the elite, the braintrust.  They believe they are a protected class, entitled to make decisions in our "best interests" despite majority opposition to their approach.  They lack the understanding to do the right thing, and, even if they understood, they lack the political will. 

November 2010 will not save us.  Even if Republicans take over the House (likely, but hardly a given) and the Senate (less likely), they will not be able to make much progress against the mass of the existing bureaucracy and the expanding power of the Executive branch.  The media will side with the President, the government unions, teachers’ unions, and the bureaucrats to quash every effort of Congress that goes in the direction of reducing the size and scope of government.  The propaganda arm of the collectivist elite will become a media air force, carpet bombing the populace with “terror on every side”.   The blame for every evil will be shifted to the opposition.  Republican politicians are still politicians.  They will try to compromise and get along so as not to be completely vilified.  While an opposition party in control of the House of Representatives would be able to slow the urban elite agenda, for the most part they will find themselves outmaneuvered by the President and his media allies.  Momentum will be lost and the debt will continue to mount.     

The reason for my pessimism is this lack of political will.  In this respect, we are very like Argentina.  Rather than freeing up the economy to reward creativity, hard work, and innovation, politicians seek a sort of economic "peace in our time" — surrendering principle for some temporary bump or gain in popularity while setting us up for devastation. 

Which is more likely — deflation or inflation?  I have thought for the last two years that it would be inflation, that our temporary, alleged deflation is just a function of recessionary pull-back in consumer spending.  Far wiser and better-informed people than I, believe than an aging American population with an increasing need to save for retirement will increase its savings rate — which is deflationary.  As is, currently, the Federal Reserves policy with regard to most banks.  Banks are not loaning money to the private sector, despite the zero interest policy of the Fed.  Financial institutions can avoid risk and make money by putting their assets into Treasuries, that is, loaning money to the Federal government.  Thus they are not loaning to businesses and the private citizens.  The money created by Federal Reserve fiat is not going out into the private sector to be the proverbial “more dollars chasing fewer goods” that creates the classic inflation scenario.  The situation currently might be described as “disinflation” rather than deflation. 

Nevertheless, inflation/hyperinflation still scares me.  We are tottering on the brink.  If there is any growth or hint of growth in the economy, things will change rapidly.  Right now, the flood of inflationary dollars is held behind a temporary dam of high unemployment and risk-averse banking institutions.  For the moment, the velocity of money has slowed almost to a standstill.  The housing and equity markets have "deflated" but the costs of many goods — especially food — is showing signs of inflating.

Stagnation or depression?  I don't know.  Economic hardship is almost a given no matter what.  Even if our governments started doing the right thing today, we would be some time in getting our economy back on a track of healthy, legitimate growth. 

Instead of listening to Barack Obama when he is reading the teleprompter, it might be helpful to see what he says in less structured moments.  Prior to the massive, “health care reform” bill’s passage, Obama made a statement saying that we were on the “precipice” of reforming health care.  The definition of precipice is a) a high cliff or crag, or b) a dangerous state or dangerous situation.  This is Obama’s unconscious talking.  Now he could have meant that it was dangerous because it seemed the bill might not pass at the time, but that wasn’t at all how it sounded.  Perhaps at a subconscious level, he knows that the destruction of the finest health care system in the world is impending. 

More recently I heard Obama speak from his subconscious again when he was talking about the slow economic “recovery”.  He said that it would take some time to “dig ourselves out of the hole we’re in”.  Generally, one does not dig out of a hole.  I could cut Barack some slack, since I doubt he’s ever had a shovel in his never-callused hand.  Still, I think it’s his unconscious admitting that everything he is doing is putting America deeper in the hole.  That is certainly the case.  Government debt is crushing the possibility of growth in the private sector.  The only expansion that has taken place in the last two years is an expansion of government.  Only the government is hiring, and the government produces nothing.  All government is parasitic rather than productive.  

Limited government, sensible government is, or can be symbiotic with regard to business and capitalism.  As government grows, however, it forces a change in the nature of capitalism.  The capitalists can either bail out - go Galt, or they can become statist partners with government.  People like George Soros, corporations like IBM and GE, and many of the Wall Street elite have taken the latter approach.  They have learned that it is relatively easy to control the economy when it is heavily regulated from a central location.  Government is used to regulate the competition out of existence. 

Individuals are much harder to control than herds.  "Corporatist" as opposed to "capitalist" business leaders prefer a centrally controlled economy.  There are not nearly so many variables, and not nearly so many bribes to pay out. 

Pyramids in Argentina

Recently, I read a piece by a man from Argentina written probably about 2006.  Argentina was a thriving country at one time, despite all the Juan and Eva Peron issues in their past.  When I was a pre-teen and teenager, I had a frequent fantasy of becoming a civil engineer, learning Spanish, and building roads and bridges in Argentina because it had a kind of Old West appeal with its wide Pampas and abundant wildlife, especially birds like the prairie chicken.  In the late ‘90’s, however, Argentina began to undergo a serious financial crisis.  Their economy collapsed in 2001.

The writer of the article I read was an architecture student and relates how he was in a social science class in 2002 where the teacher illustrated societies with a series of pyramids.  The pyramids were divided with two horizontal lines into three segments - upper class at the peak, middle class, and a lower class at the base.  The teacher told the students that the middle class served as society’s buffer and most stabilizing element.

Different economic systems where shown by how the lines were drawn on the pyramid.  A classic democratic capitalist economy had a fairly tall, steep shape with a substantial peak of rich, a very large middle class and a very thin base for the poor.  Western European socialist societies were depicted as similar to the capitalist pyramids but flatter, meaning that rich weren’t as far above the poor.  Communistic economies had a very small upper class with a minimal middle class and a large poor class.  Arrows going from the middle and low class to the upper class “bounced off” the border indicating that any upward movement within the society was virtually impossible.

The fourth pyramid showed arrows from the middle class to the lower class.  This, the teacher explained was the collapsing society of Argentina.  A country that collapses moves to a third world model where, like the communist country, movement is only downward.  The miniscule but very rich elite sit atop a minimal and disappearing middle class and a large and expanding layer of the poor.  The writer said that he and his fellow students suddenly realized they were poor.

He talked about the way his country had fallen apart and the consequences of the collapse.  Crime grew exponentially.  People were on their own in protecting themselves against violence and robbery.  Services that had been taken for granted in a modern society ceased or became intermittent and unreliable.  Food was hard to get.  Fuel quality and quantity diminished.  The power grid was down more than up.  Water quality deteriorated.  People no longer stopped at red lights if there was no traffic because a ticket was preferable to being carjacked and possibly raped or killed.  Eventually police stopped issuing tickets and many intersections had only flashing yellows.

Private ownership of firearms in Argentina was apparently fairly widespread and common.  Many who did not own a firearm initially picked one up - often on the black market.  He also discussed the black and gray markets that popped up as a result of the collapse.  This became a significant source of purchases.

Some, the writer said, thought that if a similar crisis occurred in the United States there would be a much greater degree of social unrest, rioting and violence.  His friends said that South Americans were stronger than North Americans.  At first the writer disagreed, but as he considered he began to think it might be true.  Many Argentineans had fled the civil wars in Spain or problems in Italy to settle in South America.  Societal collapse was not completely foreign to them as it is to us.

I tend to agree with his assessment.  While his experiences are not that different than what many of my friends described during the race riots of the ‘60’s, the Rodney King riots in LA, or the debacle after Katrina in New Orleans, these events were all localized and, relatively speaking, small.  Yes, if you were in the immediate vicinity there was a huge impact, but it was not “bad and nationwide”.