Way Out of Our Economic Mess
by Terry Coxon: Economically
and a hard place" is a long-running theme of Casey Research
publications. It refers to the dilemma the US government has wandered
into with its continued policy of rescue inflation. The "rock"
is what will happen if the Fed pauses for long in printing still
more money the collapse of an economy burdened by an accumulation
of mistakes that rescue inflation has been keeping at bay. The "hard
place" is the disruptive price inflation that becomes more
likely (and likely more severe) with every new dollar the Fed prints
to keep the effects of those mistakes suppressed.
When the dollar
was cut loose from the gold standard in 1971, the Federal Reserve
was freed to create as much new money as it saw fit, whenever it
saw fit. Enabled, it turned with enthusiasm to doing what central
bankers imagine they are supposed to do eliminate downturns
in the economy. The Fed fancied itself as being on the answering
end of a 911 system: whenever the financial markets signaled distress,
whenever the economy came down with the flutters, the Federal Reserve
would dispatch a van, an ambulance, a fire engine or even an assault
vehicle, whatever seemed right but in every case full of cash.
To most people,
rescue inflation was entirely agreeable. It made their world more
comfortable and seemed to make it safer. Comfortable, yes. Safer,
no. The pernicious but entirely welcome effect of rescue inflation
was to cover up mistakes and keep them going. It allowed people
especially people handling other people's money to
make progressively bigger mistakes. Lending on implausible mortgages
and buying securities tied to those mortgages are the most recent
examples, follies that required decades of training.
allowed everyone to get away with everything. The assurance that
a high-speed vehicle with flashing lights on top would always arrive
in time let individuals pay for houses with a little cash and a
big mortgage. It let corporate managers rely on borrowing heavily,
rather than selling stock, to raise capital. It let investors cheerfully
accumulate junk bonds. And it let banks hire and set loose bright
young minds to design financial gizmos with astounding leverage
guaranteed to deliver excellently profitable results for so long
as the economy continued on its excellent and guaranteed way. All
of those hang-glider stunts seemed safe because if at any point
the prices of the assets underlying anyones commitment failed
to rise... a Federal Reserve rescue inflation vehicle would surely
dash to the scene. Thats what FedVans are for.
inflation let the politicians dodge the consequences of their own
thoughtlessness. The economic drag of the tax rules the politicians
found convenient to enact and the effects that deficit spending
has on economic growth and on living standards were obscured by
the ready supply of that all-purpose balm and lubricant, new money.
that are hidden don't go away; they accumulate; and they grow. Answering
its most recent 911 call (the one that rang in 2008), the Fed dispatched
an entire fleet of trucks stuffed with cash. It increased the money
supply by 40%, yet today the economy is barely staggering forward.
At this point, creating more cash might buy some time, but it can't
buy a solution.
unless you think there isnt one, seems impossible to solve.
But rather than dismissing the possibility of a way out, it would
be more circumspect to consider how the economy might in fact navigate
between the rock and the hard place. That won't happen simply because
we've found a way for it to happen. The White House hasnt
called me in a long time. But if we understand what it would take
to slip past the rock and the hard place, we can judge how likely
such a passage is.
doesn't need anyone to fix it. It's all that fixing for the last
40 years that is the problem. Unmolested, the economy will right
itself. The only thing needed is for the Great Molester, the government,
to surrender to a serious regimen of behavior modification and let
the economy operate without suffocating interference. Then it would
be able to shed its problems not painlessly but quickly and
with a minimum of pain. Here's the protocol.
your dead. Even after catching the trillions in bailout money
thrown at them, some financial institutions remain under water
closer to the surface than before but still snorkeling. Let them
go. Release them from their zombie state. Bless them with the peace
of zero assistance and the promise of unbeing. Paying the dead to
mimic the living casts a blight on all the banks that are competently
managed, and it leaves trillions of dollars of capital to be allocated
by hired hands who've shown by their performance that their talents
call them to some other line of work.
And give up
on mouth-to-mouth for the biggest corpse of all. Stop trying to
prop up housing prices by financing the banking system's huge inventory
of foreclosed property and by funding programs to slow the foreclosure
rate. The housing market wont recover its health until prices
reach a market-clearing level.
acknowledged deficits now. That means cutting federal spending
drastically. There's already unanimous lip service for doing so,
but even if there were a genuine resolve to do it, there are an
infinite number of ways to go about it. A clean starting point would
be to revert to the last Clinton budget, which would almost certainly
require getting by on one war at a time. Stopping the deficits is
essential to allowing the economy to heal itself because it slows
the wasting of resources and because it eliminates the fear of higher
tax rates, which is a fear that retards business investment.
rules a little less stupid. The two most mischievous features
of the Internal Revenue Code are the double-taxation of corporate
profits and the deduction for home mortgage interest. The former
is a powerful and dangerous invitation for high debt-to-equity ratios;
make dividends tax-deductible for the paying company, and the problem
goes away. The deductibility of mortgage interest has operated as
an amplifier for everything the government does to encourage overinvestment
in housing. Yes, eliminating the mortgage deduction will be another
blow to the housing market, but since we're committed to bringing
out the dead, lets think about cremating the remains.
tax rules. High tax rates are bad enough for the economy. Not
knowing what next year's tax rates are going to be is much worse.
It paralyzes business decisions. Make the current rates "permanent"
in the sense that it would take further legislation to change them.
legal minimum wage to zero. Minimum wage laws are convenient
for labor unions whose members are somewhat skilled, but they toss
the unskilled into the economic dumpster. A minimum wage law effectively
prohibits the unskilled and inexperienced from working by pricing
them out of the market. Its an unemployment guarantee program
for millions of the economically weakest people in the country.
Id miss the minimum wage, because there is nothing that shouts
louder that government uses the poor as human shields to protect
the state. But to let the economy recover, let it go.
Repeal the Sarbanes-Oxley law and its weird spawn, Dodd-Frank. Repeal
Obamacare. Allow individual states to license drugs without waiting
on the FDA. End all prohibitions on insider trading. Charge banks
for FDIC insurance at rates tied to a balance sheet formula
and then free them to make their own lending decisions. (You might
like even more deregulation than that, but we're not building utopia,
we're only trying to avoid camping in dystopia.)
for Social Security and Medicare. Raise the eligibility age
by one month every year. The unfunded net liabilities for those
programs (variously estimated at $60 trillion to $80 trillion) will
evaporate, and everyone who has been counting on impossible promises
being kept will have plenty of time to come to terms with reality.
do it, and that or something similar is what it would take. The
economy might need a year or so for the dust to settle. A certain
number of mental breakdowns would be provoked by the trashing of
heart-felt assumptions, but for the other 99.9999999% of us, the
Greater Depression would be canceled.
It's not politically
impossible. Everyone, politician and politician-afflicted alike,
is capable of a 180-degree course change when fear and pain become
great enough. It's not impossible at all. And unicorns arent
impossible. Typically, they get started when a pony is fighting
At the just-concluded
Casey/Sprott Summit When
Money Dies, the all-star faculty unanimously agreed
that the US economy is in dire straits
and will be for a while.
But there are ways to protect your assets and profit from this crisis.
Listen to John Hathaway, Mike Maloney, Richard Hanley, Doug Casey,
Chris Martenson, and many more expert speakers on more than 20 hours
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investment advice. Learn
Terry Coxon is contributing editor of Casey Research.
He is president of Passport Financial, Inc., and for over 30 years
has advised clients on legal ways to internationalize their assets
to optimize tax, wealth protection and estate planning goals.
© 2011 Casey