THE HANDSTAND

FEBRUARY-MARCH2010



Endgame

John Michael Greer

http://thearchdruidreport.blogspot.com/

 

I’ve mentioned more than once in these essays the foreshortening effect that textbook history can have on our understanding of the historical events going on around us. The stark chronologies most of us get fed in school can make it hard to remember that even the most drastic social changes happen over time, amid the fabric of everyday life and a flurry of events that can seem more important at the time.

This becomes especially problematic in times like the present, when apocalyptic prophecy is a central trope in the popular culture that frames a people’s hopes and fears for the future. When the collective imagination becomes obsessed with the dream of a sudden cataclysm that sweeps away the old world overnight and ushers in the new, even relatively rapid social changes can pass by unnoticed. The twilight years of Rome offer a good object lesson; so many people were convinced that the Second Coming might occur at any moment that the collapse of classical civilization went almost unnoticed; only a tiny handful of writers from those years show any recognition that something out of the ordinary was happening at all.

Reflections of this sort have been much on my mind lately, and there’s a reason for that. Scattered among the statistical noise that makes up most of today’s news are data points that suggest to me that business as usual is quietly coming to an end around us, launching us into a new world for which very few of us have made any preparations at all.

Here’s one example. Friends of mine in a couple of midwestern states have mentioned that the steady trickle of refugees from the Chicago slums into their communities has taken a sharp turn up. There’s a long history of dysfunction behind this. Back in 1999, Chicago began tearing down its vast empire of huge high-rise projects, promising to replace them with less ghastly and more widely distributed housing for the poor. Most of the replacements, of course, never got built. When the waiting list for Section 8 rent subsidies, the only other option available, got long enough to become a public relations problem, the bureaucrats in charge simply closed the list to new applicants; rumors (hotly denied by the Chicago city government) claim that poor families in Chicago were openly advised to move to other states. Whether for that reason or simple economic survival, a fair number of them did.

Fast forward to the middle of 2009. Around then, facing budget deficits second only to California, the state of Illinois quietly stopped paying its social service providers. In theory, the money is still allocated; in practice, it’s been more than six months since Illinois preschools, senior centers, food banks, and the like have received a check from the state for the services they provide, and many of them are on the verge of going broke. Subsidized rent has apparently taken an equivalent hit. Believers in free-market economics have been insisting for years that the end of rent subsidies would let the free market reduce rents to a level that people could afford, but I don’t recommend holding your breath; this is the same free market, remember, that gave the United States some of the world’s worst slums in the late 19th and early 20th centuries.

The actual effects have been instructive. Squeezed between sharply contracting benefits and a sharply contracting job market, many of Chicago’s poor are hitting the road, heading in any direction that offers more options. Forget the survivalist fantasy of violent hordes pouring out of the inner cities to ravage everything in their path; today’s slum residents are instead becoming the Okies of the Great Recession. In the process, part of business as usual in the United States is coming to an end.

Illinois is far from the only state that backed itself into a corner by assuming that rising tax revenues from a bubble economy could be extrapolated indefinitely into the future. 41 US states currently face budget deficits. California has received most of the media attention so far, a good deal of it focused on the political gridlock that has kept the state frozen in crisis for years. Behind the partisan posturing in Sacramento, though, lies a deeper and harsher reality. The state of California is essentially bankrupt; nearly all the mistakes made by the once-wealthy states of the Rust Belt as they slid down the curve of their own decline have been faithfully copied by California as it approaches its destiny as the Rust Belt of the 21st century. I wonder how many local governments in neighboring states have drawn up plans for dealing with the tide of economic refugees once California can no longer pay for its welfare system, and the poor of Los Angeles and other California cities join those of Chicago on the road?

I could go on, but I think the point has been made. State governments are the canaries in our national coal mine; their tax receipts are one of the very few measures of economic activity that aren’t being systematically fiddled by the federal government. The figures coming out of state revenue offices strike a jarring contrast with the handwaving about “green shoots” and an imminent return to prosperity heard from Washington DC and the media. Across the country, every few months, states that have already cut spending drastically to cope with record declines in tax income find that they have to go back and do it all over again, because their revenue – and by inference, the incomes, purchases, business activity, and other economic phenomena that feed into taxes – has dropped even further. Now it’s true that state budgets get hit whenever the economy goes into recession, and keep on hurting even when the recession is supposed to be over, but compared to past examples, the losses clobbering state funding these days are off the scale, and a great many programs that have been fixtures of American public life for as long as most of us have been living are facing the chopping block.

A different reality pertains within the Washington DC beltway. Where states that fail to balance their budgets get their bond ratings cut and, in some cases, are having trouble finding buyers for their debt at less than usurious interest rates, the federal government seems to be able to defy the normal behavior of bond markets with impunity. Despite soaring deficits, not to mention a growing disinclination on the part of foreign governments to keep on financing the same, every new issuance of US treasury bills somehow finds buyers in such abundance that interest rates stay remarkably low. A few weeks ago, Tom Whipple of ASPO became the latest in a tolerably large number of perceptive observers who have pointed out that this makes sense only if the US government is surreptitiously buying its own debt.

The process works something like this. The Federal Reserve, which is not actually a government agency but a consortium of large banks working under a Federal charter, has the statutory right to mint money in the US. These days, that can be done by a few keystrokes on a computer, and another few keystrokes can transfer that money to any bank in the nation. Some of those banks use the money to buy up US treasury bills, probably by way of subsidiaries chartered in the Cayman Islands and the like, and these same subsidiaries then stash the T-bills and keep them off the books. The money thus laundered finally arrives at the US treasury, where it gets spent.

It may be a bit more complex than that. Those huge sums of money voted by Congress to bail out the financial system may well have been diverted into this process – that would certainly explain why the Department of the Treasury and the Federal Reserve Bank of New York have stonewalled every attempt to trace exactly where all that money went. Friendly foreign governments may also have a hand in the process. One way or another, though, those of my readers who remember the financial engineering that got Enron its fifteen minutes of fame may find all this uncomfortably familiar – and it is. The world’s largest economy has become, in effect, the United States of Enron.

Plenty of countries in the past have tried to cover expenses that overshot income by spinning the presses at the local mint. The result is generally hyperinflation, of the sort made famous in the 1920s by Germany and more recently by Zimbabwe. That I know of, though, nobody has tried the experiment with a national economy in a steep deflationary depression, of the sort that has been taking shape in America and elsewhere since the real estate bubble crashed and burned in 2008. In theory, at least in the short term, it might just work; the inflationary pressures caused by printing money wholesale could conceivably cancel out the deflationary pressures of a collapsing bubble and a contracting economy – at least for a while.

The difficulty, of course, is that pumping the money supply fixes the symptoms of economic failure without treating the causes, and in every case I know of, governments that resort to it end up caught on a treadmill that requires ever larger infusions of paper money just to maintain the status quo. Sooner or later, as the amount of currency in circulation outstrips the goods and services available to buy, inflation spins out of control, the currency loses most or all of its value, and the economy grinds to a halt until a new currency can be issued on some sounder basis. In 1920s Germany, they managed this last feat by taking out a mortgage on the entire country, and issued “Rentenmarks” backed by that mortgage. In the wake of the late housing bubble, that seems an unlikely option here, though no doubt some gimmick will be found.

It’s crucial to realize, though, that this move comes at the end of a long historical trajectory. From the early days of the industrial revolution into the early 1970s, the United States possessed the immense economic advantage of sizeable reserves of whatever the cutting-edge energy source happened to be. During what Lewis Mumford called the eotechnic era, when waterwheels were the prime mover for industry and canals were the core transportation technology, the United States prospered because it had an abundance of mill sites and internal waterways. During Mumford’s paleotechnic era, when coal and railways replaced water and canal boats, the United States once again found itself blessed with huge coal reserves, and the arrival of the neotechnic era, when petroleum and highways became the new foundation of power, the United States found that nature had supplied it with so much oil that in 1950, it produced more petroleum than all other countries combined.

That trajectory came to an abrupt end in the 1970s, when nuclear power – expected by nearly everyone to be the next step in the sequence – turned out to be hopelessly uneconomical, and renewables proved unable to take up the slack. The neotechnic age, in effect, turned out to have no successor. Since then, for most of the last thirty years, the United States has been trying to stave off the inevitable – the sharp downward readjustment of our national standard of living and international importance following the peak and decline of our petroleum production and the depletion of most of the other natural resources that once undergirded American economic and political power. We’ve tried accelerating drawdown of natural resources; we’ve tried abandoning our national infrastructure, our industries, and our agricultural hinterlands; we’ve tried building ever more baroque systems of financial gimmickry to prop up our decaying economy with wealth from overseas; over the last decade and a half, we’ve resorted to systematically inflating speculative bubbles – and now, with our backs to the wall, we’re printing money as though there’s no tomorrow.

Now it’s possible that the current US administration will be able to pull one more rabbit out of its hat, and find a new gimmick to keep things going for a while longer. I have to confess that this does not look likely to me. Monetizing the national debt, as economists call the attempt to pay a nation’s bills by means of a hyperactive printing press, is a desperation move; it’s hard to imagine any reason that it would have been chosen if there were any other option in sight.

What this means, if I’m right, is that we may have just moved into the endgame of America’s losing battle with the consequences of its own history. For many years now, people in the peak oil scene – and the wider community of those concerned about the future, to be sure – have had, or thought they had, the luxury of ample time to make plans and take action. Every so often books would be written and speeches made claiming that something had to be done right away, while there was still time, but most people took that as the rhetorical flourish it usually was, and went on with their lives in the confident expectation that the crisis was still a long ways off.

We may no longer have that option. If I read the signs correctly, America has finally reached the point where its economy is so deep into overshoot that catabolic collapse is beginning in earnest. If so, a great many of the things most of us in this country have treated as permanent fixtures are likely to go away over the years immediately before us, as the United States transforms itself into a Third World country. The changes involved won’t be sudden, and it seems unlikely that most of them will get much play in the domestic mass media; a decade from now, let’s say, when half the American workforce has no steady work, decaying suburbs have mutated into squalid shantytowns, and domestic insurgencies flare across the south and the mountain West, those who still have access to cable television will no doubt be able to watch talking heads explain how we’re all better off than we were in 2000.

Those of my readers who haven’t already been beggared by the unraveling of what’s left of the economy, and have some hope of keeping a roof over their heads for the foreseeable future, might be well advised to stock their pantries, clear their debts, and get to know their neighbors, if they haven’t taken these sensible steps already. Those of my readers who haven’t taken the time already to learn a practical skill or two, well enough that others might be willing to pay or barter for the results, had better get a move on. Those of my readers who want to see some part of the heritage of the present saved for the future, finally, may want to do something practical about that, and soon. I may be wrong – and to be frank, I hope that I’m wrong – but it looks increasingly to me as though we’re in for a very rough time in the very near future.

The Government is Desperate For Money

Doug Casey on Unemployment

January 22, 2010 -- Interviewed by Louis James, Editor, International Speculator)

L: Doug, I saw a Wall Street Journal headline a few days ago that boldly proclaimed, “Car Makers May Hire Soon.” Be still, my trembling heart! It’s hard to believe the WSJ would stoop to such a meaningless headline, but I guess they are just trying to give their desperate customers what they want: some hope, whether valid or not. What do you make of the unemployment situation?

Doug: Well, they say that during the depression of the 1930s, unemployment went as high as 25%. That’s interesting, in that at the time, half the people in the country were still farmers. They knew how to make the things they used in daily life with their own hands, and how to grow their own food. There was less specialization in the economy, and people were more self-sufficient. That made them better able to cope with an economic depression.

So it seems to me that that depression wasn’t anywhere near as bad as this one is going to be. It was caused by the inflation of the currency in the 1920s, by the Federal Reserve, and was prolonged by the actions that Hoover took, which were in exactly the same vein as those Roosevelt took later. Hoover was quite a dirigiste – I mean, Roosevelt applauded all the things Hoover did, but Hoover didn’t have the panache and good PR that Roosevelt did. But everything these two did – and both were disasters, lengthening and deepening the depression – was trivial by comparison to what’s being done today.

The government today is making things far worse than in the 1920s and 1930s. Everything the government is doing is not just the wrong thing; it’s exactly the opposite of the right thing. But more importantly, as far as unemployment is concerned, this inflationary boom has gone on much longer than that of the ‘20s. Not only does that call for a bigger correction, but unsustainable patterns of production and consumption have become far more ingrained.

L: Consuming more than you produce is not sustainable, but people can tighten their belts…

Doug: That’s only part of it. If people lose their jobs today… Well, they are pretty far from the land, and I’m not sure people today think about that. Back in the ‘20s and ‘30s, if your car broke down, it was expected that you would get out and, under a shady tree, fix it yourself. And you could – you could even take the engine apart and fix a bearing. That’s not in the least practical today. You’ve got to have the money to pay a specialist to fix your car today.

Back then lots of people who weren’t even farmers had vegetable gardens and chickens in their yards. Today, people live in suburbs – chickens and goats are out of the question.

L: I get it: what will unemployed golf cart salesmen do when they can’t find jobs – today, they can’t just go back to the farm and help with the chores. But they say unemployment is only around 10% now; even if that’s low, it will need to get more than twice as bad before it compares to the 1930s.

Doug: The government is saying the unemployment is around 10%, but that’s a fraud. They don’t count things the same way as they did then, not even as they did in the recession of 1982. Furthermore, they should count many government employees among the unemployed, since relatively few of them produce anything that anyone would voluntarily pay for. I’m not talking about police, garbage collectors, judges, and the like. The market would employ many of them in their current jobs even if the state were to disappear. But many of the apparatchiks filling offices not only don’t serve any useful purpose, but they actively destroy, and prevent the creation of, wealth. These people are worse than just unemployed.

Something else. Very few of the 1.5 million people in the Armed Forces actually create wealth or would be paid, in a free market, to do what they do. The same goes for the perhaps several million contractors and employees that compose the so-called “defense” industry. Obama is giving veterans preference in hiring for government jobs as well. Which means people who are not only quite jingoistic as a group but most used to taking orders – and giving them – will increasingly dominate the civil service. And, benefits included, government jobs now pay about 50% more than those in the real world. This is not a good trend any way you look at it.

The government’s unemployment figures basically include people who are paid to dig ditches during the day and others who fill them up at night.

L: And they don’t count “discouraged workers” as being part of the workforce, so they’re not unemployed.

Doug: Yes, it’s like that cartoon you ran in this month’s International Speculator, showing all the groups of people who are not working but who are not counted as unemployed. People who’ve given up looking for jobs are not unemployed, Ph.D.s working a few hours a week at Walmart are not unemployed, and there are more stupid evasions like that going on. So fewer and fewer of the numbers they give us are meaningful.

But I always look at the bright side. Many of these people will find their way into the underground economy and provide goods and services to others without government approval. All the taxes they’re saving means they can effectively double their take-home income, or charge half as much, or some combination. And, very important, it denies revenue to the state, even as it puts the thought into people’s heads that they don’t need the state – the state needs them. Many who spend time in the “black economy” might even get the idea that being independent is preferable to being a serf.

L: I just looked up John Williams’ shadow stats on unemployment, and he’s showing BLS Broadest unemployment, which includes “short-term discouraged workers” at over 17%. His SGS alternate unemployment, which includes “long-term discouraged workers” (who were “defined out of official existence in 1994”), is about 22%.

Doug: So, it’s already much worse than people think. And on top of that, people seem to suffer from a mass delusion that things will get better soon. I don’t think things will get better anytime soon. For one thing, the level of debt in the U.S. is off the charts. Debt means you’re borrowing from the future, saving means putting something aside for the future. The level of debt in all areas – real estate, credit cards, personal loans, and so forth – has brought Americans to negative savings in recent years, a first. That didn’t even happen during the Great Depression.

One of the things that makes this particularly serious now is that rumors are circulating about the government licking its chops over all the money sitting in personal pension funds, Keogh plans, HR-10 plans, etc. The Pension Benefit Guarantee Corporation (PBGC – like the FDIC, but for pension funds) is bankrupt, and it’s going to get much worse. It’s still early days in this grand misadventure. Usually – not always, but usually – when things get really bad, they float some trial balloons to see how people might react to things they are considering. One of the most dangerous proposals floating out there now is that, since people’s pension plans have been hurt so badly, people should be required to buy annuities with their pension funds.

L: Isn’t that what Social Security is supposed to be?

Doug: Well, that’s never been anything but a welfare scheme. Logic does not apply in the government sphere. One way or another, the government will get more involved in pensions, and I suspect they’ll do it like they did down here in Argentina. I doubt most Americans are aware that the Argentine government basically nationalized everyone’s private pension plans last year, including those denominated in dollars, and now they are going to pay people in pesos, fresh off the printing press. I think the same thing is going to happen in the U.S.: they’ll require that a certain percentage of your pension plan be used to buy T-bills, or other government securities, or an approved annuity. This will be for the safety of The People, of course. The end result will be to wipe out an entire form of financial security Americans count on today.

L: What should Americans with pension plans do?

Doug: The smartest thing to do would be to get them offshore. I say this so often in these conversations and other places that I fear sounding like a broken record, but it’s really that important. But it’s absolutely true that for an American, the safest wealth is the wealth that’s outside of the U.S. Your biggest risk is a political risk, from a completely bankrupt U.S. government. Most people are completely unaware of it, but it’s possible to buy productive foreign real estate in your pension plans. It would be difficult for the government to force people to repatriate such assets, and that affords a measure of safety.

People should look at this. The government is desperate for money. They are going to run a trillion-dollar deficit this year, plus, they have to roll over a trillion and a half dollars of short-term paper, so somehow they are going to have to find buyers for $2.5 trillion of debt this year.

L: Somehow, I can’t imagine the Chinese and Japanese lining up to pour that much money into U.S. government promises.

Doug: And absolutely not at the artificially low interest rates the Fed is maintaining. They are going to be in a mad scramble for money; the Federal Reserve will likely wind up buying a lot of it, which could result in up to 2.5 trillion more dollar bills floating around the U.S., in just one year. So, they really are between a rock and a hard place, as we’ve been saying in The Casey Report. There’s just no way out. So I think the pension plans are going to be the next victims of this ongoing crash.

L: So… We have, and will have, much higher unemployment than the government is admitting, and at the same time, the government is going to steal people’s savings?

Doug: That’s precisely what’s going to happen. Unemployment is going to stay high, because the whole of U.S. society is oriented towards patterns of production and consumption that are unsustainable. They were built on a pyramid of debt, and that debt is collapsing. I don’t know what the new patterns are going to be, but there are a lot of people who are going to have to find totally new things to do.

And they’re going to have to find new places to live as well. They just aren’t going to be able to afford their McMansions. Even if the government helps them pay their mortgages, they are not going to be able to pay the soaring real estate taxes, they are not going to be able to maintain them properly, and they are not going to be able to pay the utilities.

L: And again, by “patterns of production and consumption,” you don’t just mean spending more than you make. You mean that the U.S. has a surplus of paper pushers and telephone sanitizers, and a deficit of people who actually make things of value, and therefore, as a society, is not productive – or something along these lines?

Doug: Yes. Think about some of these businesses that have grown up during the boom times – like personal trainers. The “service economy” in general. Americans have gotten used to the notion of “We think, they work.”

L: Meaning that Americans don’t do physical work?

Doug: Right, so they go down to the gym to exercise. A personal trainer is nice to have but is completely unnecessary. All you really need is a little willpower. Incidentally, I’m not a fan of physical labor; it tends to be of low productivity. Machines should do it and eventually will do most of it. So there should be much more wealth in a free market, with much less work as a result. But you get there by thinking and using engineering and science to give reality to the thoughts.

Unfortunately, few Americans study these things. They go for subjects that range from those that are worth less than nothing – like political science, collectivist economics, and gender studies – to those that are simply worth nothing – like English lit, psychology, and history. As you know (see our conversation on education), I’m not at all opposed to these things. It’s just that you should study them on your own. Meanwhile, kids from the Orient and Eastern Europe are doing math, science, and engineering. I suppose future Americans can do their menial jobs, and a few can become entertainers or athletes.

L: We have a bunch of young Eastern Europeans working for us, and they’re very bright and competent.

Doug: Indeed. Another job that I think caters to the artificially high patterns of consumption we’ve seen over the last 25 to 30 years is being a lawyer. Millions of people have become lawyers over the last couple decades, and 95% of them are unnecessary and a drain on the economy.

L: I read in another WSJ article that crime has actually dropped since the crisis hit, which doesn’t make it sound like boom time for lawyers.

Doug: Well, few lawyers actually defend criminal cases, but that is interesting. Another surplus is MBAs, of which it seems we have millions; if they had any possibility of succeeding in business, that’s what they’d be doing, instead of wasting time and money listening to academics yap about it. And people in the financial business – there’s going to be much less demand for brokers, bankers, advisors, planners, and such in the years to come. They’ve come to expect a lot of money for shuffling paper, based on the financial industry being in a bubble. A huge swath of white-collar workers are going to have to figure out a new and productive way to put bread on the table. Assuming they still have a table after their McMansion gets repo’d.

L: What about Starbucks and all its clones? You think people are going to be willing to pay $5 for a cup of coffee during the Greater Depression?

Doug: It’s interesting… you know, even when I was a kid, one of the catchphrases people used when someone would offer an opinion was: “That and 10 cents will get you a cup of coffee.” Since a cup of coffee almost anywhere cost about 10 cents, the implication for the value of the opinion was clear. And a cup of coffee was still 10 cents not so many years ago in most places – your $5 cup of Starbucks coffee is a long way from there.

Given how little a cup of coffee really costs, even with inflation, Starbucks may be a dead man walking; many people are going to be forced to dispense with the extravagance. So there will be a lot of unemployed baristas. However, an argument can be made that in tough times, people do without big luxuries but will still buy little luxuries to make themselves feel better. So I’m not saying Starbucks will disappear; I just don’t think there’s really a market for one on every corner. I expect they’ll wind up closing more than half their stores.

More generally, I’d say there’s just too much retail out there.

L: Particularly high-end retail. I wonder how many $1,000 bikes will be sold when people can go to Walmart and get a decent, light-weight aluminum bike for $100 or less.

Doug: And how many closets full of suits and shirts and pants and shoes are out there that people don’t even use? Who’s going to buy clothes when they have more than they can wear and don’t have a job? A lot of that stuff is going to last a long time.

L: So, short Calvin Klein and Eddie Bauer?

Doug: Almost no retail business is a good business today. The only exception I can think of is a grocery store.

L: People are going to need to eat, no matter what.

Doug: That’s really about it.

One business that’s been pretty good over the last decades is the public storage unit business. People have so much stuff, they can’t even fit it all in their garages – which they need for their boats and ATVs – and their attics are overflowing. People simply have too much stuff, and they are going to stop buying it as their wages go down. Maybe eBay is the way to go, as people try to unload some of the stuff they’ve accumulated to raise cash.

Here’s the thing about unemployment: you can’t just think in terms of the U.S. Americans have insanely high wages, relative to people in other countries of equal intelligence, maybe a better education, and definitely a better work attitude.

L: That’s for sure. I had three guests, former students of mine from the Republic of Belarus, who stayed with my family this summer – at the height of the post-crash scare. Everyone was moaning about there being no jobs, but these kids got on the bikes I lent them and rode for many miles every day until they found jobs – at least two each. And these are students who’d never worked a day in their lives, had no experience whatsoever, no training, nothing to put on a resume. But they wanted to work and were eager to exchange labor for dollars.

Doug: What kind of jobs?

L: Kitchen help in a pizza restaurant, stocking shelves in supermarkets, stuff like that.

Doug: In other words, the kind of labor self-respecting Americans don’t want.

L: Yes. You know, leftists complain that globalization is unfair to poor countries – but in fact, modern production is becoming increasingly independent of geography, so pay rates worldwide are trending towards more equality than the world has ever seen. Wages are rising in the third world and dropping in the first. Like it or hate it, it’s capitalism that has been helping the poor around the world, with real, productive work – not socialist government handouts.

Doug: Yes, pay scales are being homogenized. Which is why you can expect places like the U.S. to fight the trend with quotas, tariffs, and the like.

You know, properly speaking, the “correct” level of unemployment is zero. Theoretically, the demand for goods and services is infinite. My own desire for goods and services has no limit, and neither does anyone else’s. So even if everyone worked 24/7, they could never satisfy all the potential demand. It’s just a matter of allowing people to work at wages that others are willing and able to pay.

L: So, it’s minimum wage laws and price controls that create unemployment – there’s no natural unemployment rate in the market?

Doug: Yes. Previously, for many years, the government used to say that the normal or correct rate of unemployment was 6%. How they came up with that number, I don’t know.

L: Probably threw darts at a board.

Doug: Yeah, they picked some number out of the air, found a pliable economist to write a paper with a bunch of mathematical symbols, and it became part of the cosmic firmament. It’s ridiculous. In a free-market economy, there would be zero unemployment or even negative unemployment, as particularly ambitious individuals would have two jobs.

L: Okay, but back to these (forcibly) United States…

Doug: I’m sorry to say, it’s going to get much worse. With 15% of the population collecting food stamps, and another 15% eligible but unaware or unwilling to accept the stigma – yet – and more people accepting various other government subsidies, there will be a growing population that doesn’t want to work. In response, there will be higher minimum wages that will keep more of the unskilled out of work, and more regulations and higher taxes will keep businesses from hiring more people. The government is going to enact lots of new laws, supposedly to protect the employees, and that’s going to make it much riskier to hire anyone. It’s a truly vicious cycle that’s going to cause serious structural unemployment for a long time.

L: You think the government will be stupid enough to raise the minimum wage when businesses are failing left and right?

Doug: Yes, of course they are. I’m surprised they haven’t raised it to $20 or $25 per hour.

L: Sure, why not $1,000/hour – we’d all be rich!

Doug: [Laughs.]

L: So, if it’s that bad and getting worse – if the real unemployment rate is just a few percentage points lower than it was during the Great Depression, why don’t we see more lines outside of soup kitchens?

Doug: Well, those people I mentioned getting food stamps – they’re not getting stamps anymore. They get a thing that looks like a credit card. They don’t have to stand in line at any special store or soup kitchen; they can just go down to the nearest Safeway and load up on Twinkies. But I have seen a lot of stuff on YouTube about people living in tent cities. So it’s not as different from last time as you might think – and this time it’s still just getting started. Which reminds me: people in the real estate and construction businesses had better prepare for a long, long drought.

L: I just did a search on YouTube for “tent city” and got 2,660 results. Did you see the one about the uproar over a tent city named Obamaville?

Doug: That’s a good example, and I’m sorry to say that I’m convinced that it’s going to get much worse. There’s no way out for the average person. Except to take stock of his position, hunker down, and figure out what goods and services he can provide others at prices they can afford.

L: Any suggestions for readers?

Doug: Cut down on your standard of living while you can do so in a controlled way – or the market will do it for you. Greatly increase your rate of savings. And be very careful of what you put your savings in.

L: Investment implications? Short retail?

Doug: Yes. Bet against Wall Street, bonds, and after a few months, the U.S. dollar. It’s not a pretty picture.

L: The sort of stuff you cover in The Casey Report.

Doug: Yes, exactly. I wish I could assure everyone that things are going to get better soon. But that’s not the case. This is just the first act. It’s better to be aware of an unpleasant reality than to be blindsided by it.

L: Okay then, another sobering conversation – we’ll have to talk about something more upbeat next week, or we’ll leave our readers too depressed to read us anymore.

Doug: Just remember what Robert Friedland always says: the situation is hopeless, but it’s not serious.

Copyright © 2010 Casey and Associates

Explaining Banking to Bank Directors

By Karl Whelan

February 2nd, 2010

The Federal Reserve has announced a new initiative: A website to explain banking to new bank directors. No, really, they have. From the press release:

“Many people who are asked to serve on bank boards have little training or experience to prepare them for their new roles,” said Patrick M. Parkinson, director of the Federal Reserve Board’s Division of Banking Supervision and Regulation. “This website has been developed with new directors in mind, but there is plenty of useful information for those who have already spent time on bank boards.”

In relation to the Irish banks, one can certainly argue that bank directors with little experience of banking, finance or economics played a role in their downfall. It will be interesting to see if this is an issue touched upon by Mr. Regling in his report to the banking enquiry.

This raises a more general question: Why are bank boards so commonly made up of people with little relevant experience? Is this an issue that needs to be addressed by regulators in the future? Or is it too much to expect bank directors to have technical expertise and these issues are best left to management, with boards simply overseeing corporate governance issues?
http://www.irisheconomy.ie/