US Debt and the Roadblocks to Renaissance

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It would be almost laughably easy to bring a real renaissance in the US.

But first you have to understand the real problem. It’s not a lack of stimulus… Or, the inequality of income distribution… Or because the feds didn’t regulate enough. Or that bankers are greedy…or that capitalism won’t work.

The problem is debt. There’s too much of it.

And there’s too much of it because the feds encouraged people to borrow and spend too much. That’s what a pure paper dollar system does. The US spends. Money goes overseas. But instead of returning it to the Treasury and exchanging it for gold, the foreigners keep the money overseas. It’s used as bank reserves. In effect, Americans never have to settle up. The debt just builds and builds and builds. Accumulated US trade deficits since 1971 tote to some $8 trillion. That’s the difference between what Americans have spent overseas…and what they’ve sold to foreigners.

And it is still growing by about $50 billion a month.

Much of this money does eventually come back to the US. But it comes back as debt. The foreigners lend it back to the US government. This helps enable US government debt to grow at about $100 billion a month.

Too much debt causes problems. It turns malignant. Economies can’t ‘recover’ until the debt is reckoned with. But reckoning with debt is painful. The bankers (who hold much of the bad debt) and the politicians (who often work for the bankers) don’t want to suffer pain. They want someone else to suffer it…preferably someone in the future, someone who is not yet of voting age.

But it doesn’t work. As the economy slows under the weight of debt, the pain spreads.

Last week, President Obama announced a $447 billion jobs program. The Dow went down 300 points.

That is all we know. And all we need to know. Investors no longer believe that stimulus measures will produce the long-awaited recovery. Stocks are headed down.

Bernanke has pledged to keep lending at negative interest rates for the next 2 years.

And now Obama has come up with nearly a half-trillion in new spending (making nonsense of the recent debt-ceiling discussions).

They’ve fired both barrels, in other words — fiscal and monetary — and the Great Correction didn’t flinch.

Why? Because the Obama plan adds debt; the very thing the economy needs least of all.

And more thoughts…

What do employers think of the plan to put Americans back to work? Here’s The New York Times, on the case:

Jen-Hsun Huang, chief executive of the chipmaker Nvidia, said the incentives that President Obama has proposed won’t cause the company to hire any more people or change the kinds of people it hires.

That sentiment was echoed across numerous industries by executives in companies big and small on Friday, underscoring the challenge for the Obama administration as it tries to encourage hiring and perk up the moribund economy.

The plan failed to generate any optimism on Wall Street as the Standard & Poor’s 500-stock index and the Dow Jones industrial average each fell about 2.7 percent.

As President Obama faced an uphill battle in Congress to win support even for portions of the plan, many employers dismissed the notion that any particular tax break or incentive would be persuasive. Instead, they said they tended to hire more workers or expand when the economy improved.

Economists estimated that President Obama’s plan, costing an estimated $447 billion if it were ever fully adopted, could create anywhere from 500,000 to nearly two million jobs next year.

Most of those jobs would be added, economists say, as workers spend the additional take-home pay that would result from a proposed payroll tax cut for employees. As consumers increase spending, that can prompt more hiring by retailers, washing machine makers, restaurants and more.

Some of the new jobs would also probably come from measures like the proposed $35 billion to retain or hire teachers, police and firefighters, as well as $30 billion to refurbish school buildings and $50 billion to build or repair highways, railroads, transit systems and waterways.

*** And oh yes…how could you cause an economic renaissance in the US? Simple. Get rid of the zombies. The whole society is chock full of them. Expensive, time- and money-consuming zombies.

A friend (who works for a government bureaucracy) explained:

“I’m a managerial accountant at the [federal agency]. I see how it works from the inside. Nobody asks whether what we’re doing makes any real difference. They just ask how much money we’ll get next year. Then, they sit around trying to figure out ways to increase our appropriations. We really couldn’t spend our budget for this year — not effectively. But you know what they say: ‘use it or lose it.’ They’ll get more money next year.”

Every aspect of life is zombified. Even the US military. The Pentagon has become a huge spending machine, just like other federal bureaucracies. Does all its spending make the nation safer?

Nobody asks. Nobody cares.

But how do you get rid of the zombies?

Just cut off their food supply.

Instead of futzing around with a ‘jobs program,’ just cut taxes to 10%. No deductions. No explanations. No credits. No nonsense. You pay 10% on all your income. Period.

Heck, serfs in the Dark Ages only had to pay 10% of their incomes (usually in the form of labor) to their lords and masters. Why should Dear Readers have to pay more?

A flat 10% tax rate would cut off the flow of blood to the zombies. Most would die off. Bad debt would implode. Bad businesses would go broke. Bad assets would become worthless.

Then, with the necrotic economic tissue cleaned away…the economy could heal. And then, grow.

Regards,

Bill Bonner,
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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Comments

  1. Back to the Middle Ages it is :)

    Philip Coggan
    September 13, 2011
    Reply
  2. Based on working within the welfare arm of the Australian government, we too could remove many layers of zombies. Eg, I quoted 30 seconds of work to run a 1 line command and my managers schedule 2 days work for themselves. Return of the Living Dead.

    Reply
  3. Oh no, those nasty feds who “encouraged people to borrow and spend too much”.

    But the feds didn’t lend them the money, the banks did. And they profited handsomely from the lending. Then they had loaned all the money they could to all the people who were good for it so they started lending to people who were not good for it and damned if those nasty feds didn’t keep on encouraging them to do so, offering, tacitly, to make good on those loans at the public expense. What else is “too big to fail”?

    But then the lenders discovered that there wasn’t enough profit in just lending money so they switched to brokering deals, to collateralising debt obligations etc etc and every time they packaged up some debt, sanitised it, lied about its value, they sucked in more, not borrowers, but lenders who could not control their greed for profits from the debts of others.

    Until there was no more debt to lend to anyone for anything, then the commissions stopped and the defaults started and the lenders went club in hand to the nasty fed and demanded to be paid off or they would bring the house down.

    The only people who saw what was being done clearly were the Icelanders who were going to be stiffed for the failure of private contracts between private banks and private depositors and, in true capitalist fashion, told the private and voluntary contractors to piss off and fail as needed.

    Everyone else is too frightened to be a capitalist when the chips are down. But it sees to me that those who are tough when there is nothing to fear and run for mummy’s skirts when tough starts to come back at them, are not capitalists, although the term does start with a C.

    Reply
  4. This article is spot on!
    I lived in Japan during the ‘lost decade’ of the 1990’s. I saw many zombie companies go bust but only after a prolonged period of time where the Japanese government stupidly propped them up.
    It was only after the mildly succesful, yet nevertheless aneamic, “reforms” of Prime Minister Koizumi, that Japan showed real possibility of economic growth.
    It’s still a much better place to invest than the US though.
    Australians are living in denial if we think things aren’t going to get much worse, really quickly, here really soon.

    Alexander Malejew
    September 14, 2011
    Reply
  5. As a big fan of British comedy, I was always under the belief that Americans just didn’t get irony.

    Clearly after their lecturing to Europe the other day asking (almost demanding) that it sort its debt problems out because it was harming the World’s economy ……. I’m not so sure anymore, seems they get irony just fine !!

    Reply
  6. I read constantly about Japan’s ‘lost decade’ and the comparison with the current situation in the USA and many other Western economies. However Japans’ bond holders are essentially its own people, therefore its own economy and State is still self sufficient and what has really been lost is ‘opportunity’. On the other hand the USA and most other Western economies have their bonds owned by foreigners and without the influx of external capital their current ‘zombie’ economies and States would not function – They have lost more than a decade they have ‘lost the lot’ including their ‘soul’.

    Reply

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