Saturday, January 30, 2010

A Letter To An Awakening Friend

I wrote the letter below to a friend of mine who has just discovered He and I had spoken many times in the past couple of years about the mid-east wars, the economy, politics, etc., and I always knew he was more of a neo-con than a conservative. But he has an open mind, so we were able to talk productively even though we disagreed on the interpretation of current events. Having stumbled on libertarian/conservative information on his own and finding it convincing enough to be disturbed by it means that he is moving more in my direction. I wanted to let him know I agreed.


(Sorry, in advance, for my long response)
I checked out the blog. Interesting. There is a lot of crossover information here with the websites I frequent. My focus has been on the current economic/political situation and the likely unfolding of events in the future. The Survivalist Blog seems to cover much of the same information with the added twist of advising how people can protect themselves. The writer seems sane and measured, not wooly haired and crazy-eyed. There is probably good prudent advice in there that we should all take.

As for the alarming nature of the information: I lose sleep sometimes when I get too far "down the rabbit hole." The causal connections, several times removed, between actions of our "leaders" and the meltdown of our economy and the perversion of our Constitution, sometimes is so clear to me that I cannot understand why other people cannot see it. Then I remember that I've been reading related stuff for the last 35 years, and that I cannot expect the average person to just read one book or article, or even a dozen books and articles, and expect them to come to the same conclusions I have.

I believe we are in for a very difficult time in the future. The large picture is: our economy was fooled by easy money generated by deficit spending, expansionist Federal Reserve policy, and fractional reserve banking.

People thought they were richer than they really were (I was one of them); they borrowed and bought and pushed prices upward for thirty years with the expectation there would be more money tomorrow.

When the new money was not sufficient to fulfull our expectations of ever-increasing prices, prices began to fall.

Falling prices began to reveal unsound investments (think: real estate, but it applies to other areas of the economy also) and the loans that supported them could not be repaid.

The banks and investment houses that were the most leveraged (fractional reserve banks are always insolvent, by their nature) were the first to collapse, leading to a chain reaction of insolvencies and credit contraction, which destroys the circulating money supply (just as increasing credit in a fractional reserve system creates money) and principle paydowns (which sucks money out of the economy).

With a decreasing circulating money supply (despite the trillions the Fed pumped into favored banks to prop them up, which they either can't or won't lend), asset prices will continue to drop...for a far...leading to bone-crunching deflation, unemployment, bankruptcies, etc., a process that, if allowed to happen, would be complete in a year or so as the economy adjusted to the new reality of a lower money supply, then started growing again...

But the trillions of dollars being lavished on the financial houses by the Fed will eventually find its' way back into the circulating money supply.

The new money will begin competing with existing money for existing goods and services, and in a very short time prices will skyrocket...but wages will not (why? because of the large number of unemployed workers who, due to competition with other unemployed workers, cannot demand higher pay).

This will result in bone-crushing inflation for everyone, but especially for people on Social Security, pensions, or other fixed state aid.

If the scenario I have written above is correct, our country is in for an extreme amount of instability, both political and economic. People will be discouraged, and maybe even dangeously hungry. They will get restive, possibly violent. With the instability will come calls for more law and order, which will come at the expense of the Bill of Rights. The question will be: will the American people rediscover the wisdom of the Constitution (which, if followed, would have prevented this scenario to begin with), or will they adopt a different political framework, such as a leader cult or an oligopoly?

There is no way of knowing how it will all resolve itself, but it is unlikely that the America of our youth will be the America of our future.

Saturday, January 16, 2010

Review: "How America Can Rise Again"

A Canadian friend of mine sent me a link to James Fallows' latest Atlantic Online article entitled "How America Can Rise Again." While I think highly of Mr. Fallows' writing, I am usually at odds with his conclusions. My reaction to this article was no exception.

In presenting his case, first he catalogs the ills currently plaguing the U.S.: high unemployment and loss of the middle class, disintegrating infrastructure, lagging communications development, dysfunctional Federal government, and military overreach. Then, as if laying out a balance sheet, he points to assets that offset these liabilities: relative openness of the society, welcoming of immigrants, plenty of money, world-leading university system, and a 400 year tradition of "jeremiads" leading to reflection and change. These strengths, he believes, will allow America to reshape itself through political reforms (he is partial to the Parliamentary system).

Mr. Fallows admits he has been away from the country for a few years and that his impressions of America, upon his return, are somewhat skewed by his experience in
China. Certainly, compared with China, America is more open, multi-ethnic, flexible, rich, and educated. One could stand in China today and compare it to China of twenty five years ago and make the same comparisons and come to the same conclusions. But it is questionable whether one can say that about America of 1985 and America of 2010. The weaknesses in America are real and growing, whereas the strengths, also real, are almost all in decline. Following the trend line of the past couple of decades, the future is bleak.

What do I mean? Let's take openness to immigrants, for example. Yes, Americans are generally an accepting people. It is common to find foreign born citizens or permanent residents in all walks of life, and there is absolutely no animosity aimed at them (unless they are Arab, which is a whole other discussion). If there is an anti-immigrant constituency, it is limited to "illegal" immigrants (read: Mexican). However, the laws and government policies concerning foreigners coming to the U.S. are a very different story. The visa hurdles, the quizzing and profiling at points of entry, the heavy hand of the Transportation Safety Administration, and the bureaucratic nightmare of running afoul of immigration rules (especially if you are Arab), has led to a decline in the number of foreign visits to the U.S. in the last ten years, despite a general rise in tourism and transnational travel in the rest of the world. Highly publicized incidents, such as that of the British little-old-ladies en-route to Australia who refueled in L.A. only to be forced to deplane and stand for hours with no bathroom breaks while awaiting interrogation by the TSA, have only served to shine a spotlight on our official "unwelcome" mat at the door. Official policy: if you are foreign, you are a potential enemy.

As for the flexibility of our society, that, too, is a relic of the past. What made us flexible economically and socially in the past was a relative dearth of legal restrictions. It has long been noted by European economists that the U.S. has been a marvelous job-creating machine over the last several decades in contrast to the relative stagnation of much of Europe. Double digit unemployment in France, Spain, and Germany has been the norm for over a generation. Why not in the U.S.? Because we had fewer reasons NOT to invest, NOT to hire, NOT to expand. In France, for example, it is very difficult to fire a worker (this was intended to tip the power scales in favor of workers), so employers are very reluctant to hire in the first place for fear of being burdened with unproductive workers. The result is institutionally encouraged unemployment. No such rules existed in the U.S., but when glancing at the ever-expanding mandates on employers for documentation, citizenship verification, mandatory leave, matching taxes, minimum wages, and soon-to-be government required insurance, one can see the disincentives to hiring building up. We are not yet France, but we are no longer encouraging employment.

And employment is only one area of rigidity. Business licenses, zoning, permits, professional licensing, and continuously changing IRS accounting rules make starting a new enterprise a daunting task. John Stossel did a report on a French company that made pay-per-use curbside toilets and the trials and tribulations they endured trying to get through New York City's regulatory maze. In the end, the company chose not to enter the U.S. market due to onerous regulation, despite strong approval and demand from the New Yorkers who got try out the prototype. When our business environment is less flexible than that of France, we are almost certainly headed in the wrong direction.

What's more is that the mood in Washington is toward more, not less, regulations and mandates. The recent TARP program, the Stimulus Bill of 2009, and the actions of the Federal Reserve in bailing out large financial institutions send a clear message: We Will Not Allow Change To Happen. James Fallows considers our flexibility to be one of our greatest strengths, as indeed it has been, but it is quickly fading as we build institutional firewalls that prevent change from happening.

Mr. Fallows makes the puzzling case that we are wealthy enough to remake the countries of the Middle East, so we are wealthy enough to rebuild our infrastructure. It does not seem to occur to him that one of the main reasons our infrastructure has not been repaired is BECAUSE we are bleeding our wealth into the sands of Iraq, Afghanistan, Pakistan, Yemen, and maybe soon Iran. One expense precludes the other. The longer we are expending our limited wealth (and ALL wealth is limited) overseas, the less likely we will have the resources to rebuild our roads and bridges. With the Obama administration seemly committed to never ending war, our infrastructure will continue to fray and unravel.

What's more is that it is becoming more apparent that for the last several decades Americans have been, at best, treading economic water. Due to anomalies in measuring wealth over time, it is difficult to put an exact number on it, but it is becoming disturbingly clear that where one income used to be enough to finance a middle class household, it now almost invariably takes two. In the past ten years, middle class Americans' incomes have been in decline. Draw that trend line again, and weep.

As far as the assertion that institutions of higher education will lead the way to the new American revival, I say, huh? For the last several decades, the vast majority of college graduates do not work in any field they studied for. Indeed, my own experience tells me that a college degree is particularly good at narrowing the field of candidates for an employer to consider, but with the exception of task-specific professions such as engineering, medicine, or law, most education takes place on the job. Our ever-increasing college graduate population has failed to guarantee our continuous growth, so I would not now look to the Universities to lead us out of our current decline.

Mr. Fallows talks about our history of jeremiads. I never heard that word before, but I like it. Yes, we have a long history of bleating into the wind how we are in decline due to our sins, then we pull out of it with some new a bigger advance in wealth and living standards. He states that this current decline may, in fact, be irreversible, but he goes back to the jeremiads of the past and shows how we roused ourselves from our stupor and conquered our ailments. He's betting on that happening again, just because it always happened in the past.

I hesitantly concur. There are numerous voices out there. Some are calling for more and bigger roles for government, some are calling for less. Some are wanting more war, some want to bring all our troops home. Some are clambering for more surveillance and security, and some are lobbying for the return of habeas corpus and our Bill of Rights. Some voices are even calling for a plutocracy of experts to run things (oh, how Platonic!). Which voices will be heard will determine whether or not we will recover or stagnate.

And finally, Mr. Fallows presents us with a political choice to make: "Doing more, or doing less." He chooses doing more with our political system in the form of public/private partnerships, though recognizing that the body politic is sick and "gangrenous." Without active public institutions, private efforts will dissolve into chaos and criminality, he says. To me, this is a bit of a jump. Maybe even a straw man. Doing less is exactly what the Chinese did in order to revive their economy. The Russians have also been experiencing growth as a result of "doing less."

If less can deliver more, then why shall we not consider that avenue of action? Fifty years of continuous government growth have led us to the "lost decade," so maybe it is time to reverse course a bit. The assertion that less government would deprive the society of wealth making opportunities, or even result in the breakdown of private institutions, is unsupported by American history, post cold-war history, economic theory, and current practical experience. James Fallows comes to, ironically, a very conservative don't-rock-the-boat conclusion: let's muddle through and everything will be fine.

This is almost certainly not how America can rise again.