Know thy enemy

Understanding economics is vital to understanding how to fix the problems we face.

The field of conventional economics tries to provide the tools needed to understand economics. Efforts to quantify the economy have been made, but even adherents to conventional economics understand the limitations in trying to apply theories to a field as diverse as economics. Nonetheless over the years the conventional assumptions take root in academic institutions and the like, where the knowledge is passed down, rarely changing although the theories are scrutinized when they appear to be ineffective.

The response to the 2008 crisis is an example of conventional economic theories failing to explain the problem. So it’s inevitable that solutions offered by conventional economics will not work.

The biggest crisis we’re facing is demographic. It’s important to understand that the Baby Boomers peak earning years are behind them. Few have much saved up, and already the cost of health care is rising rapidly due to the number of aged. Any economics solution that doesn’t consider demographics is doomed to fail.

We need to distinguish between systemic problems and those we can fix. Systemic problems are those which the system is incapable of addressing without changing the system.

The best example of systemic failure in economics is Japan from 1991 to the present. No matter what the Japanese try to do, they can get little growth out of their economy.

A systemic problem requires change at the system level, and more significantly demand a change in policy direction using new assumptions and unconventional analysis.

Any country with a big bureaucracy naturally is terrified of change. It was Iceland that actually changed its banking system after the 2008 crisis. Bankers were prosecuted and jailed for the fraud they committed–hundreds jailed as opposed to only two in the entire U.S..

Of course the global financial establishment punished Iceland in the short-term, but the country has recovered nicely. Whatever pain it suffered in jettisoning the conventional banking system it has since converted into a pro-Main Street banking system that isn’t dependent on central bank intervention, largely in the form of foreign loans from the IMF.

A second big systemic issue is the issuance of money and overabundance of money. This has led to speculative bubbles. It’s also led to moral hazard among many large banks–the belief that no matter how badly they manage their money, they’ll get bailed out and thus are free to lose as much money as they want.

Of course the unending replenishment of money allows the banks to behave badly. Yet no matter how bad they seem to get, the government can only fine them, fines that are paid by the endless fountain of nearly free money they can borrow from the Federal Reserve, if they’re big enough.

The regulations, you see, are not about making banking safer for consumers but rather are meant to serve a perverted system that forces arduous regulatory requirements on smaller competitors and shields bankers from the legal consequences of their criminal activity.

The ultimate systemic perversion is the way that the banking cartel has been allowed to borrow for essentially nothing, and lend at very high interest rates.

Clearly paying interest is an economic negative. We don’ hear in the corporate media scarcely a word about how the monetary system works. For if we did, as Henry Ford said, there’d be revolution by morning.

What kind of country lets its banks charge the poor such userous rates? What benefit is there to redirecting wages into ridiculously high rates of interest?

The Nazi example is the best. They nationalized the banks and made interest-free loans available to small businesses, albeit with piles of restrictions no doubt. They rose politically because they implemented policies removing the drag of interest, which doesn’t need to be charged except by a system beholden to the bankers. (In Europe Jews had been limited to fields like banking, so anti-Semitism popularized the dismantlement of the German banking system.)

If you really want an economy to grow, you build Main Street. Helping Wall Street not only doesn’t impact Main Street–as the current US example is proving–it drains future growth. Why? Because the engines of future prosperity aren’t able to afford the debt they must incur to start their businesses.

The entrepreneurial capacity of this country is unfathomable. Given the right financing, Main Street can really shine. Ironically, a real Main Street recovery helps Wall Street! Medium and larger business succeed when small business are formed and profit. Look at the 1990’s–when Boomers were reaching their peak earning years, and huge sums were moving into retirement accounts, fueling an unprecedented bull market.

Of course there are systemic challenges that the Main Street economy must face. Starting businesses isn’t easy. But don’t underestimate the entrepreneurial mindset–hard work and a can-do attitude really can make things happen.

One trap conventional economists fall into is their belief in the value of top-down architecture for economic recovery. By this, I mean they are so convinced that a couple tweaks of key economic instruments like interest rates will lead to some miraculous, trickle down effect wherein all boats rise–or at least they want to be seen that way.

How disconnected our politicians have grown! The money interest surrounds them, funds academics, and feeds their egos and campaign chests. It’s always been bad but now the cronyism has reached extreme heights.

Wealth inequity is the most glaring example of failure of an economic recovery. The flow of money in the form of interest, coupled with the nearly free money available to borrow–has led to a reverse Robin Hood and the Main Street economy shows it. Main Street is a challenging environment, and conventional analysis shuns risk in favor of more controlled outcomes.

I saw in the news recently that some fund manager was shocked at the poverty of the homeless on the street. How can it be this bad–I can see him thinking–somebody should be taking care of these people.

Well, gross inequity is a horrible sight and of course those with wealth and influence go out of their way to avoid seeing how bad it is on the other side. So when the two meet, of course the privileged side can be quite shocked and confused at the real economic costs of inequity and how horribly destitute a population subject to unregulated capitalist system can become.

This reminds me of the Buddha’s first hours outside the palace where he was raised. He saw death and sickness for the first time, and realized human existence was suffering.

Note how he didn’t understand things while in the palace; it took leaving the palace to escape ignorance, in this case of how bad things were out in the streets of ancient India.

How little things have changed. Today we see in our streets the consequences of a system that exploits the young and the poor, even to the point of social decay. Instead of supporting job and business formation on Main Street, our top-down system aggregates more and more wealth to those with access to cheap capital: the already rich.

Success in our society is more a product of having money than it is about working hard. Called social mobility, the chance that an American will do better than their parents has dropped below that of European countries.

Do Americans want this? Polls show that regulation has a place but the political will to make changes simply isn’t there. Because it’s a top-down system, with unrestricted corporate lobbying, decisions are made far from Main Street in the cozy corridors of power in our capital. A statist system with a central banking cartel won’t allow changes that reduce the power and control that such a system offers. There are simply too many pigs too deep in the trough with too much power and too little conscience.

The insulation of the rich and politicians no doubt helps sustain the myth that the nation’s problems can be solved out of Washington, in a system unchanged from that which lead us into the crisis. Hiding in the palace leaves one’s conscience un-assailed, and suffering that goes unseen is un-felt.

People believe what they want to believe. Those with wealth want to believe that the existing system serves their interest.  And to some degree it does. But if the suffering on Main Street continues to increase, at some point the bulk of the people will rise up against the existing order.

The borrowing is sustainable in the short term. The Federal Reserve can keep the chronically deficit-ridden federal budget from collapsing entirely. It can buy the government’s debt and keep financing the deficits.

Predictably, the politicians of both parties will take advantage of the Fed’s never-ending largess, to borrow and spend in ways neither fruitful nor practical, like giant aircraft carriers or glorious projects that appease the egos of the wealthy and their puppets in the political class.

The banks and Federal Reserve must know that eventually the greed and incompetence of their vetted politicians will crush the entire economy, not only that of Main Street but Wall Street, too.

It’s already happening. The price of gold rises dramatically. Manipulation of the price of Comex contracts-not to be confused with real physical gold–has been ongoing.

It’s doubtful that your average economics major has heard of the President’s Working Group on the Capital Markets–the Plunge Protection Team, or PPT. Yet the current system is doing everything it can to sanitize the markets in such a way as to seem much more stable than they really are.

The great fear is that investors will make huge withdrawals that will trigger a collapse in the markets. The way it is, so many algos are just waiting for these kind of market events, in order to exploit the volatility. With a lack of regulation, restraining this kind of trading is no longer feasible, except perhaps through a financial transaction tax, a tax that has zero chance of passage–or about as much as Bernie has through a primary system designed to stop a populist like him.


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