The current economic landscape feels tumultuous. It’s evident that significant changes are on the horizon, yet the individuals guiding us through this turbulence inspire little confidence.
This week began with a notable crash as Wall Street diminished American Airlines’ stock by 33 percent. In stark contrast, President Obama remarked that, in his view, “Americans aren’t better off than they were four years ago.”
Following this, Federal Reserve Chairman Ben Bernanke addressed Congress, coinciding with a drop in 10-Year Treasury yields to 1.72 percent. In his speech, he underscored the limitations of monetary policy, stating, “Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy.”
Clearly, both the President and the head of the Fed aren’t downplaying the situation merely out of goodwill. They didn’t achieve their positions solely through virtuous conduct. Instead, they are casting doubt on current conditions to rally support for their forthcoming strategies aimed at rescuing the nation from its predicament.
This inevitably suggests increased spending of borrowed funds and a planned devaluation of the currency. This approach is the only strategy they know, and they may persist with it until it drags us all down.
Yet, an alternative path exists. Although this option will be challenging and will require a level of political courage not seen in recent times, it is within the realm of possibility. To illustrate this, we present today’s insightful essay written by our colleague Terry Coxon from Casey Research.
Enjoy the read,
MN Gordon
Economic Prism
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A Solution to Our Economic Dilemma
The phrase “a rock and a hard place” frequently appears in Casey Research discussions. This phrase encapsulates the predicament the U.S. government faces due to its persistent reliance on rescue inflation. The “rock” symbolizes the potential fallout if the Fed hesitates to print more money, risking the collapse of an economy burdened by compounded errors that rescue inflation has only masked. The “hard place,” meanwhile, refers to the likelihood of escalating price inflation, which becomes more probable—and possibly more intense—with each additional dollar printed for the sake of maintaining the illusion of stability.
Since the dollar was untethered from the gold standard in 1971, the Federal Reserve gained unprecedented authority to generate money as it saw fit. With this newfound freedom, the Fed enthusiastically pursued a strategy to eradicate economic downturns. It viewed itself as a fire department, ready to respond with cash when financial markets showed distress or the economy faltered.
Many people welcomed rescue inflation. It seemed to create a more comfortable, if false, sense of security. However, while it provided temporary relief, it also obscured fundamental mistakes and prolonged unsustainable practices. This environment encouraged reckless behavior, allowing individuals—especially those handling others’ finances—to make increasingly significant errors. Some recent examples include issuing unrealistic mortgages and investing in securities tied to them, mistakes that required a long learning curve to manifest.
Rescue inflation provided a false sense of safety. The expectation that help was guaranteed led individuals to purchase homes with little down payment and massive mortgages. It enabled corporate managers to prioritize heavy borrowing over equity funding for capital. Furthermore, investors were lured into accumulating junk bonds, and banks created leverage-heavy financial instruments promising high returns for as long as the economy maintained its upward trajectory. The overall sense of safety was deceptive, underpinning a reliance on the Fed as a safety net in times of trouble.
Additionally, rescue inflation allowed politicians to evade the repercussions of their own shortsightedness. The negative economic consequences of self-serving tax policies and deficit spending were obscured by an influx of new money.
However, hidden issues do not disappear; they accumulate and grow. In response to the financial crisis in 2008, the Fed launched an unprecedented wave of monetary support, boosting the money supply by 40 percent, yet the economy now barely moves forward. Creating more cash may provide temporary relief, but it cannot resolve the underlying issues.
The challenges seem insurmountable. Nevertheless, it is prudent to explore how the economy might navigate through these turbulent waters. Such a transition won’t occur simply because we wish it to; it requires understanding and commitment to the necessary actions, despite the absence of direct government engagement.
The economy does not need anyone to rescue it; in fact, the multitude of interventions over the past four decades have contributed to its current struggles. Unhindered, the economy could correct itself if only the government would adopt a radically different approach, stepping back to allow the market to function without excessive interference. By doing so, it could expunge its problems swiftly, though not without some discomfort. Here’s a potential plan:
1. **Let Failures Fail.** Despite receiving trillions in bailout funds, some financial institutions remain afloat only nominally. It’s time to release them from this state of limbo. Providing continued support only serves to stigmatize properly managed banks and misallocates trillions in capital.
2. **Stop Artificially Supporting Housing Prices.** Cease the attempts to prop up housing prices by financing the banking system’s vast stock of foreclosed properties or the foreclosure process itself. Genuine recovery in the housing market can only occur once prices are allowed to return to a marketplace equilibrium.
3. **Cut Federal Spending.** Immediate action to halt acknowledged deficits is crucial. While there is consensus on the need to do so, translating that into real policy changes will be challenging. A logical starting point could be returning to the last budget under President Clinton, which would likely require managing a single war at a time. Eliminating deficits is essential for the economy to heal, as doing so would conserve resources and mitigate fears of rising tax rates, which can hinder business investments.
4. **Revise the Tax Code.** Simplifying the tax structure could improve economic stability. A critical issue is the double taxation of corporate profits; making dividends tax-deductible for paying companies could alleviate this. Likewise, revising the home mortgage interest deduction could curtail the government’s incentivization of excessive housing investments.
5. **Stabilize Tax Rates.** Unpredictable tax rates paralyze businesses. Establishing current tax rates as permanent would foster greater confidence in business planning.
6. **Eliminate Minimum Wage Laws.** While favorable for unions representing skilled workers, minimum wage laws push unskilled individuals out of the job market. Allowing employers to pay based on what they can afford fosters employment opportunities for lower-skilled individuals.
7. **Ease Regulations.** Repeal excessive laws such as Sarbanes-Oxley, Dodd-Frank, and portions of Obamacare. Allow states to regulate pharmaceuticals without federal delays. Ending prohibitions on insider trading and adjusting FDIC insurance costs based on banks’ balance sheets could reform lending practices.
8. **Reform Social Security and Medicare.** Gradually raise eligibility ages by one month each year, significantly reducing unfunded liabilities while allowing individuals time to adapt to these changes.
This comprehensive approach may require a year or so for recovery, and it may provoke a number of emotional reactions as long-held beliefs are challenged. However, for the vast majority of individuals, such reform could lift the specter of a prolonged economic downturn.
Importantly, such a transformation is not politically unfeasible. People, both in power and those affected by it, can pivot dramatically when faced with significant fear or discomfort. It’s not beyond the realm of possibility. After all, anything is conceivable when the right circumstances arise.
Sincerely,
Terry Coxon
for Economic Prism
[Editor’s Note: At the recent Casey/Sprott Summit When Money Dies, experts unanimously agreed on the dire state of the U.S. economy and its potential for lasting challenges. However, there are strategies to safeguard your assets and capitalize on this crisis. Engage with thought leaders like John Hathaway, Mike Maloney, Richard Hanley, Doug Casey, Chris Martenson, and more as they share valuable insights over 20 hours of recorded sessions, including their top investment recommendations. Learn More.]
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