| How Bad the Economy Really Is |
February 4, 2009 - December 29, 2012
Author: Bart klein Ikink
|
Introduction
Most people do not realise how bad the economy really is. The mainstream media are associated with the government and corporate interests so they are not necessarily telling the truth, especially when the truth could disrupt the current social order. Most people are oblivious about what is happening [+]. In some respects the situation is worse than during the Great Depression. This seems an exaggeration as the living standard of living of most people has risen significantly over the last seventy years, but people are now more vulnerable to setbacks as they have lost most of their survival skills. The recent economic recovery in the United States is debt driven, unbalanced and weak [+].
The main differences between the Great Depression and the current economic situation can be summarised as follows:
- Economic statistics are adjusted in such a way that the economic situation looks better than it really is.
- Oligarchs are running the affairs. This has effectively ended what was left of democracy in the Western world.
- Markets were relatively free before and during the Great Depression, so market forces could correct imbalances. Now markets are manipulated and therefore markets cannot correct imbalances until the system breaks down completely.
- Before the Great Depression, people had more savings and government budgets were more balanced. Now many people and governments are deeply in debt.
- Derivative products may result in a meltdown of the financial system. During the Great Depression there were less derivative products.
- Before the Great Depression, living standards were relatively low compared to now, and less people were living in cities, so people could adapt more easily to the new situation. People in the Europe and the United States today are accustomed to a high standard of living, while they are deeply in debt. Many people will not be able to survive if society breaks down.
|
Economic statistics obfuscate the truth
Productivity gains often go together with job losses in productive sectors. Because most value is added in marketing and sales and not in manufacturing, closing down factories may result in a higher productivity. Production can be outsourced to a low wage country. In such a situation factory workers are fired and only the marketing and sales people keep working for the company. The added value per employee in the company may rise when less people create nearly the same added value. This did not lead to higher wages. During the last decade the share of labour in the national income has declined in the United States, signalling the growing effect of international wage competition.
Many countries have adjusted their way of measuring inflation several times. Practically all adjustments lowered the inflation reading. In this way politicians were able to confiscate the wealth of savers by printing money. Lowering the inflation number also helped to keep pensions and benefits lower than they would otherwise have been if the inflation calculation was unchanged, because in many countries pensions and benefits track inflation. At first inflation was considered to be the change in money supply. Later on the definition of inflation became the change in the general price level. Prices tend to rise less than money supply because there is economic growth. Economic growth means that more products and services become available, which has a lowering effect on prices.
The general price level is difficult to measure because the following questions arise: Which products are relevant for the price level and how are additional features of a product to be taken into account? This created opportunities for hedonic price adjustments, such as the following: If memory and disk size of computers double every two years while their price does not change, computers become 30% cheaper each year. If 3% of investment and consumption in a country concerns computers, this does reduce inflation by 1% each year. A number of this kind of adjustments have been done, making price inflation in the US probably 3% lower compared to the method used before 1992. Hedonic price adjustments make sense to statisticians compiling economic data but they are subjective.
|
Economic growth is the change in all economic activity measured in the currency of the country adjusted for inflation. Understating inflation means overstating economic growth. In the past decades inflation in the US probably was around 3% higher if it was measured the same way as it was done before. Economic growth would then have been around 3% lower each year. The United States probably had low or negative economic growth for nearly two decades if the methods of calculating statistics had not been changed.
Unemployment in the United States is higher if it is measured the same way as it was done before 1992. The unemployment rate in the United States is around 20% in 2009 if excluded categories of workers are included. More information about the way statistics are allegedly used to make the US economy look better can be found at the Shadowstats.com site of John Williams. His work is controversial and his calculation methods are not always open to public scrutiny. Mr. Williams has a service to sell so he has an interest in portraying the government data in a negative way. Most mainstream economists do not support his views [+], but there is evidence indicating that statistics are used to create a more rosy picture of the economy.
Former Reagan budget director David Stockman admitted that BLS is used to make the economy look better than it is, and that this already happened during the tenure of Ronald Reagan [+]. He wrote:
In short, if you spend a little time with these numbers you will know that they are being made up. Funny thing that I remember during the depths of the 1982 recession Reagan read in Human Events one night that the seasonally adjusted numbers were being manipulated and one should look at the unadjusted numbers, instead. The next morning during an economic update briefing Reagan said, he wanted to talk about the "unadjusted" unemployment rate. Marty Feldstein turned white as a ghost, and then talked him out of it. |
|
Oligarchs are running the affairs
The financial sector has captured the governments of the United States and Europe [+]. This has effectively ended what was left of democracy in the West. It is clear that Western governments, and most notably the US government, are now under corporate control. In the past decades politicians were bribed into reducing financial sector regulation. As a consequence, financial institutions were able to take on leveraged positions that at first produced high profits but later had to be bailed out.
The population has been threatened by the prospect of chaos that will result from a financial collapse. In this way citizens were forced to accept the bail outs and guarantees. The US government and the FED have committed trillions of US dollars to bailout activities and guarantees. In the same fashion governments in Europe have committed trillions of euros to prop up the financial system. The American and European taxpayers may end up paying trillions of US dollars and euros in bailing out financial institutions.
The loose monetary policies in the United States of the past two decades created a reckless financial sector that was betting on government and central bank assistance in the form of reduced reserve requirements and lower interest rates. Now this does not work any more, and taxpayer money has been used to keep the financial sector afloat. This will create even more moral hazard than the loose monetary policies did, which means that in the future even more money may be needed to sustain the financial system.
The multinational corporations and the financial sector are controlled by a small group of oligarchs. They operate behind the scenes and have increased their share of wealth over time. By bribing politicians the oligarchs turn the governments into a front operation to consolidate their power and to increase their profits. The oligarchs operate like parasites on the productive labour and enterprise of others. Their activities are hidden behind a facade of democracy and a compromised profession of Economics promoting the current economic order [+]. According to Dr. Darryl Robert Schoon the oligarchs are worried [+]:
Their 300 year-old system of credit and debt concocted to drain the productivity of others has succeeded beyond their wildest dreams; but it has come at a cost - their host, society, upon which their profits depend is now collapsing. |
Markets are manipulated
Markets such as stock markets, bond markets and commodity markets are influenced to sustain the system and to serve the interests of the financial sector. The Working Group on Financial Markets, more commonly known as the Plunge Protection Team or PPT, is monitoring markets and trying to prop them up in times of crisis [+].
In the past decades carry trades have helped to sustain the imbalances in the global economy. Especially the Yen was used to buy the US dollar and other high yielding assets. In this way trade imbalances did not lead to an adaptation of currency rates to the underlying economic fundamentals. When markets cannot adapt to the underlying fundamentals, tensions build because in the end fundamentals rule the markets. Postponing the inevitable only makes the process of adaptation more intense.
People and governments are deeply in debt
In most Western economies debt expansion was the driver of growth in recent years. Debt expansion in the Western economies has reached the limit of possibilities. Only printing money outright on an unprecedented scale did keep the economy afloat in recent years. In the United States the amount of primary money M1 rose rapidly after the financial crisis started. On top of that many governments increased spending.
Without fundamental changes, it is likely that the economies of the United States and Europe will remain in depression like conditions for the coming decades. If economic growth in the United States is still measured like it was before 1992, then the United States has already been in depression like conditions since 2001.
George Soros expected that the coming depression will be worse than the Great Depression [+]. The Great Depression ended in World War II. It is possible that the coming depression will last for decades and may result in resource wars. Weapons systems are now more destructive than in 1940 so World War III has the potential of ending human civilisation.
Derivatives
Derivative products may result in a meltdown of the financial system. Warren Buffet called them financial weapons of mass destruction. Many derivative products are not regulated. Derivatives are not well understood, even by some of the market participants using them. The total notational value of those products amounts to more than a thousand trillion US dollars. On the losing side of the trades, losses on derivatives probably amount to tens of trillions of US dollars.
It is not well understood which parties have taken on obligations that they cannot honour. Many parties have hedged their bets using other derivative products. If some parties cannot make good on their promises, a series of cascading defaults may occur and the financial system may cease to function.
When Lehman Brothers went down, this happened. Central banks and governments were able to avert a meltdown by committing trillions of US dollars and euros to bail outs and guarantees. Those guarantees cannot be withdrawn, because at that moment the meltdown will resume. The end result may be that the value of the US dollar and the euro drop because the guarantees are an equivalent to printing money. The consequence will be high inflation in the United States and Europe.
Social unrest is lurking
If the economy does not recover and the middle class slips into poverty, social structures will dissolve. In cities social structures are already practically non-existent. Therefore big cities are vulnerable to anarchy. The current economic policy of money printing called quantitative easing, together with population growth and climate change, will lead to higher prices for necessities like food. Investors and speculators hedge against the rising prices by buying up commodities, making prices increase even further. Rising food prices can cause social unrest [+].
The economy of many Western nations is in a structural decline. An important reason for the economic decline is that a transition to a service economy is a transition to a third world economy in disguise. Production is replaced by services that are not essential while the infrastructure is neglected. When the economy starts a significant decline, it will be reinforced by job losses in the service sector when people begin to cut expenses on non essential items, and in this way the decline becomes structural. Because of this, the job market will not recover, and wages will remain under pressure [+].
The United States government is preparing for social unrest by creating legislation to implement martial law while bypassing the Constitution [+]. Three million people in the United States are preparing for the worst, which is a complete collapse of the society based on cheap fossil fuels and the division of labour [+].
The future
In recent decades hundreds of millions of people were able to increase their living standards. The accelerating consumption of irreplaceable natural resources has create a serious challenge for the future. This will not only affect Western nations but also emerging countries like China, India, Brazil and Russia.
Exponential growth has been a Faustian bargain or a deal with the Devil because it cannot last [+]. Energy constraints and the availability of natural resources will become determinant drivers of future economic development.
Without further action, a collapse of human civilisation may lie ahead. The age of exponential growth fuelled by cheap energy, may turn out to be a mere blip in the age of time, like the graph below illustrates. But it does not have to be this way. It is possible to have an acceptable standard of living for humanity in the centuries to come.
|
