The Myth of American Capitalism

American capitalism is dead.

I’m sensationalizing a bit with the first sentence, but the reality is that American capitalism is on life support. We’re propping up a facade of capitalism and millions of people are blaming “deregulation” (to slander the ideals of capitalism) on this long drawn out “recession”. I’m using a lot of “quotes” here because “deregulation” is a misnomer and the “recession” is really a depression masked by bogus inflation numbers and massive government deficit spending and a decline in the value of the US Dollar. That last sentence was a mouthful, so let’s start with these myths…

Deregulation is defined as the act of freeing from regulation, particularly government regulation. The idea that the federal government deregulated the banks is much like the idea that The Constitution clearly uses the words “separation of church and state”. Deregulation, in the sense that is being used to slander capitalism, was merely a change in the regulations by the government that created holes that thousands of bankers and millions of consumers took advantage of.

Nobody can take a loan out for 125% of the value of their home and honest think there is nothing wrong with that. Just like nobody can offer a loan at 125% of the value of a home and not think there is nothing wrong with that. Just like nobody in the Federal government can pickup a newspaper from 10 years ago about 125% loans and not think there is something wrong. If you can, you’re exactly why we are in the banking mess we are today.

 

Recession is defined as a decline in GDP, employment, and trading lasting a period of six months to a year. Earlier, I referred to bogus inflation numbers and massive government deficit spending and a decline in the value of the USD. First, the inflation numbers don’t require a rocket scientist (because supposed economists clearly aren’t capable of the math)  to figure out that they are false.

Simply take a look at what goes into calculating the Consumer Price Index (CPI). You will find few line items where the government is not heavily subsidizing/regulating that industry. Given that the federal government is more than $14 trillion in debt, it’s pretty clear that inflation numbers are considerably underestimated. If you didn’t follow that last part, I’ll help explain: if is costs you $3.15 for a gallon of milk at the grocery store but the federal government is providing subsidizes to milk producers to the tune of $0.50/gallon, the true cost of a gallon of milk for you is actually $3.65. I’ll admit that I haven’t done the research to find out the exact $/gallon of milk the subsidizes equate to, but you can get the point. Now, count this over the hundreds of entitlement programs the Federal government spends money on, and you have a real problem with the calculation of the CPI (inflation).

To further exacerbate the national debt issue, people don’t really consider the buildup of interest on the national debt as part of the total problem. This isn’t that unusual. A lot of people in business often forget about how borrowing money from a bank or investors requires payments that impact the actual bottom line of the company. Here’s a simple way to think about it: when the Federal government was over budget by $455 billion in 2008, the total increase in national debt was actually more than $1 trillion.

This all compounds!

When you include the devaluation of the USD abroad and the fact that we purchase so much product from overseas and that it takes 6+ months for that devaluation to ripple its way into our prices, you get rest assured that there are much higher prices coming to a store near you very soon…

 

Now, let’s get back to capitalism. At the beginning of this article, I needed to dismiss the myth of low inflation over the last decade so that we could really see that this “recession” is indeed a depression (I’m betting that decades from now, we will finally admit in our history textbooks that the numbers were wrong and that this is a depression).

Capitalism has been slandered by the myth of deregulation. Deregulation was a change in regulation that anyone sane and honorable would have realized had massive holes that were being taken advantage of. Nobody wanted to halt the good times, so our governments (which could have done something about it) did nothing for years! That’s NOT deregulation. It wasn’t an act of capitalism. Plenty of people warned for years about pending doom, and they were dismissed as pessimistic and bearish.

However, these aren’t the true measure of capitalism’s comatose state. The true measure is that we look to our politicians to “create jobs” and provide “bailouts”. What is capitalistic about bailouts? NOTHING! What is capitalistic about too big to fail? NOTHING! The funniest part about “too big to fail” is that the giant banks that were too big to fail were merged with existing banks, making those new banks too bigger to fail! Why weren’t the banks broken up into smaller pieces with the non-profitable sections written off and offset by “bailout” money? But I digress, and that’s for another sub-1000 word blog.

The Capitalist mindset in this economy would be this: What can I improve, change, or invent that would make a profit, provide jobs, and improve our economy. Instead, we are waiting for Obama to create more Federal jobs, and the “Republicans” are spewing forth their usual taxes rhetoric. Even Sarah Palin is talking about how can the federal government create jobs and stimulate the economy. What would best stimulate the economy would be a strong USD position, 10% reduction in all federal government spending and an increase in taxes. Of course, anyone will say I’m crazy and it wouldn’t work. Because it obviously didn’t work in the 90s when Clinton did it, right?

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The Failed Logic of QE2 and Obama’s American Export Policy

Obama is talking a talk that sounds great on the surface but can ultimately lead to a massive loss of jobs in America rather than creating jobs. Bernanke is helping to speed along this economically devastating Administrative policy with equally rash monetary policy. I understand where Obama is coming from. He wants to create jobs in America. The thinking by the Fed is that by the Fed devaluing the USD (US Dollar), American goods will become more affordable to China and other nations. Sounds great! On paper…

However, it is a clear indication that Obama and Bernanke don’t understand the United States’ position in the world economy. An import economy does create jobs, contrary to what the Obama Administration makes it sound like. Yes, manufacturing jobs have been lost in America. However, importing still creates jobs. A lot of jobs for that matter, and higher paying jobs! The major key to being a strong importing nation is having a strong currency. The stronger the USD, the greater the ability to import products from other countries.

The Federal Reserve, under Bernanke, has weakened the USD significantly over the least several years. The Obama administration is trying to create more manufacturing jobs in America on the backs of the import industry. Yes, import jobs will be lost as the USD continues to decline, but the result isn’t going to be layoffs, it’s going to be import businesses going bankrupt.

Now, this isn’t a too big to fail claim about the import industry. This is a claim that America doesn’t have the ability to produce all the same products that China does. What has taken decades to build in China is not going to happen overnight in America. Additionally, the typical Chinese worker makes a fraction of what an American worker would make for the same product. So, either American’s are going to have to take lower paying jobs or the cost of products are going to skyrocket!

Some argue that China is manipulating the RMB (Renminbi/Yuan) so that it’s export business continues to thrive at the detriment of America. There may be some validity to the claim the claim of currency manipulation, but it isn’t much unlike Bernanke’s QE and QE2, which are just fancy terms for devaluing the dollar. That is what Bernanke has done. He was devalued the USD. You can call it Quantitative Easing all you want, but a rose by any other name…

There is a large trade deficit between America and China, but it’s not across the board. For instance, where are Chinese airliners getting their planes? Where are they getting their MRI equipment? The advanced technology comes from America. A weaker dollar will lead to lower real profits by Boeing, GE, and other leading American businesses. Here’s the reality of a weaker dollar. So what if your widget sells for $500 when that $500 is only the equivalent to $300 from just 10 years ago!

A weak currency policy is a terrible monetary policy for America. An Administrative policy supporting exports is a good one when the focus is on exports that those other countries can’t make. Is the US really going to compete with the Chinese with making knock off MP3 players and cell phones that get thrown away every 2 years? Those will only be high paying jobs because the value of the USD will have declined to much to make America competitive with China that we’ll have gotten to the status of a 3rd world economy.

I’m being dramatic for a reason. The world economy has been centered on a strong America and strong USD for decades. The result of a devalued USD and trade restrictions with countries we’ve been importing from for decades is not what anyone in America is going to want. Enormous amounts of wealth has made its way to other nations like China, Mexico, and others. Those countries are seeing improvements in their quality of life. The US should continue to lead the world economy with a strong USD position and strong import position. The whole idea behind imports and exports is that countries export what they do/make best and import what other countries do/make best. The US still does and makes many products, services, and technology better than any other country.

The Solution: The Obama Administration should focus on leading technology industries (instead of rehashing dying industries in America) and creating greater tax incentives to grow those industries (just like Clinton did with the Internet)! Congress should act as well to impeach Bernanke. It is fully within the power of Congress to do so. Further, the Obama Administration can take action in the Treasury Department by not selling bonds to The Federal Reserve. These actions would send a sound message to the world economy that the United States is standing for a strong USD, strong US consumption, and leading the world economy out of this depression with swift action. These actions would take about 9 months to catapult the US economy and world economy out of this depression. The message to the rest of the world is that America wants to continue to *lead* the global economy rather than play a reactive role in the global economy.

Why this Recession is Going to be Worse than it Should Have Been

It’s going to be 6-9 months before things start moving into recovery, and they are going to get much worse over the next 3 months. And that is a best case scenario. Why is this recession going to be so long and so severe? Simple, we denied it was happening for almost an entire year!

Remember, according to our government our economy was fundamentally strong just 3 months ago. That wasn’t the case then. That wasn’t even the case a year ago.

Recessions are fairly simple to recover from if they are dealt with responsibly. Ignoring it for 12 months just dug us a deeper hole. It would be like ignoring a broken leg for 12 months. Your leg would take longer to heal and would probably heal incorrectly (i.e. via $700 billion government bailout = $15 billion automobile industry bailout).