The problem that is stopping the US from recovering is not a lack of stimulus or inequality of income distribution. The problem is having too much debt. This debt was brought up by individuals being encouraged to borrow and spend too much.
By Bill Bonner
It would be almost laughably easy to bring a real renaissance in the US.
But first you have to understand the real problem. It’s not a lack of stimulus… Or, the inequality of income distribution… Or because the feds didn’t regulate enough. Or that bankers are greedy…or that capitalism won’t work.
The problem is debt. There’s too much of it.
And there’s too much of it because the feds encouraged people to borrow and spend too much. That’s what a pure paper dollar system does. The US spends. Money goes overseas. But instead of returning it to the Treasury and exchanging it for gold, the foreigners keep the money overseas. It’s used as bank reserves. In effect, Americans never have to settle up. The debt just builds and builds and builds. Accumulated US trade deficits since 1971 tote to some $8 trillion. That’s the difference between what Americans have spent overseas…and what they’ve sold to foreigners.
And it is still growing by about $50 billion a month.
Much of this money does eventually come back to the US. But it comes back as debt. The foreigners lend it back to the US government. This helps enable US government debt to grow at about $100 billion a month.
Too much debt causes problems. It turns malignant. Economies can’t ‘recover’ until the debt is reckoned with. But reckoning with debt is painful. The bankers (who hold much of the bad debt) and the politicians (who often work for the bankers) don’t want to suffer pain. They want someone else to suffer it…preferably someone in the future, someone who is not yet of voting age.
But it doesn’t work. As the economy slows under the weight of debt, the pain spreads.
Last week, President Obama announced a $447 billion jobs program. The Dow went down 300 points.
That is all we know. And all we need to know. Investors no longer believe that stimulus measures will produce the long-awaited recovery. Stocks are headed down.
Bernanke has pledged to keep lending at negative interest rates for the next 2 years.
And now Obama has come up with nearly a half-trillion in new spending (making nonsense of the recent debt-ceiling discussions).
They’ve fired both barrels, in other words — fiscal and monetary — and the Great Correction didn’t flinch.
Why? Because the Obama plan adds debt; the very thing the economy needs least of all.
What do employers think of the plan to put Americans back to work? Here’s The New York Times, on the case:
Jen-Hsun Huang, chief executive of the chipmaker Nvidia, said the incentives that President Obama has proposed won’t cause the company to hire any more people or change the kinds of people it hires.
That sentiment was echoed across numerous industries by executives in companies big and small on Friday, underscoring the challenge for the Obama administration as it tries to encourage hiring and perk up the moribund economy.
The plan failed to generate any optimism on Wall Street as the Standard & Poor’s 500-stock index and the Dow Jones industrial average each fell about 2.7 percent.
As President Obama faced an uphill battle in Congress to win support even for portions of the plan, many employers dismissed the notion that any particular tax break or incentive would be persuasive. Instead, they said they tended to hire more workers or expand when the economy improved.
Economists estimated that President Obama’s plan, costing an estimated $447 billion if it were ever fully adopted, could create anywhere from 500,000 to nearly two million jobs next year.
Most of those jobs would be added, economists say, as workers spend the additional take-home pay that would result from a proposed payroll tax cut for employees. As consumers increase spending, that can prompt more hiring by retailers, washing machine makers, restaurants and more.
Some of the new jobs would also probably come from measures like the proposed $35 billion to retain or hire teachers, police and firefighters, as well as $30 billion to refurbish school buildings and $50 billion to build or repair highways, railroads, transit systems and waterways.
And oh yes…how could you cause an economic renaissance in the US? Simple. Get rid of the zombies. The whole society is chock full of them. Expensive, time- and money-consuming zombies.
A friend (who works for a government bureaucracy) explained:
“I’m a managerial accountant at the [federal agency]. I see how it works from the inside. Nobody asks whether what we’re doing makes any real difference. They just ask how much money we’ll get next year. Then, they sit around trying to figure out ways to increase our appropriations. We really couldn’t spend our budget for this year — not effectively. But you know what they say: ‘use it or lose it.’ They’ll get more money next year.”
Every aspect of life is zombified. Even the US military. The Pentagon has become a huge spending machine, just like other federal bureaucracies. Does all its spending make the nation safer?
Nobody asks. Nobody cares.
But how do you get rid of the zombies?
Just cut off their food supply.
Instead of futzing around with a ‘jobs program,’ just cut taxes to 10%. No deductions. No explanations. No credits. No nonsense. You pay 10% on all your income. Period.
Heck, serfs in the Dark Ages only had to pay 10% of their incomes (usually in the form of labor) to their lords and masters. Why should Dear Readers have to pay more?
A flat 10% tax rate would cut off the flow of blood to the zombies. Most would die off. Bad debt would implode. Bad businesses would go broke. Bad assets would become worthless.
Then, with the necrotic economic tissue cleaned away…the economy could heal. And then, grow.
for The Daily Reckoning
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