Monday, August 24, 2015

The Meltdown

Oh Monday has hit and guess what? The Fed and the Fisc are out of ammo. Easy money and reckless stimulus spending have driven up asset classes, such as equities, with a predictable boom. But now, are we on the precipice of a bust? And if so, what can Uncle Sam do--the government's broke and central bankers can't move interest rates below zero (at least technically).

As the graphic above shows, big business bailouts, easy credit for Wall Street and more stimulus spending does little to help those firms where most of America is employed. Small businesses, who don't get the benefit of government favors, are paralyzed under an Obama administration that raised their taxes, regulated their enterprise, slashed their return on savings with artificially low interest rates, and drove health insurance premiums to historic highs. In fact, small firms bear a regulatory cost of $10,585 per employee (greater than large corporations due to scale), according to the SBA. So what to do?

First, we all need to realize you can't have consumption without production. Policies that seek to encourage the consumer (such as redistributing wealth from savers to spenders) are EXACTLY what got us into this mess. No doubt you often hear that consumers are 70% of the economy--nonsense. When you buy a retail product, that's counted as 'consumption,' but only because you've netted out all the business to business transactions that created the final product. The way out of the economic malaise after trillions in government pump priming is to pivot once and for all and encourage private sector growth, savings and investment with a sane fiscal policy towards the PRODUCERS. That means lower taxes & regulations, and fewer government subsidies.

Monetary policy can put us into a recession; but it can't end one so forget the Fed. Its balance sheet has gone to over $3 trillion and where's the money? Well, those who get it first, the big financial firms, are either keeping the excess as reserves or loaning only to the safest of borrowers: big corporations and the U.S. Treasury. And those entities aren't investing for the long haul. They're sitting on the cash, speculating on asset prices or paying down the previous easy money debt burden. Why? Because the climate for taking investment risks in America is lousy. So forget about the large corporate profits you're hearing about as well. They mean little for the average household whose median income is still thousands below what it was 8 years ago.

The bottom line is we live in an era of state-sponsored corporatism where the climate for taking investment risks is punitive and only the most favored of large firms who promise to do the government's bidding on the environment (the green bailouts from Solyndra to A123 to wind farms), health care (AMA & big insurance), organized labor (Detroit), and campaign finance (Wall Street) come out in the black. 94 million Americans are now out of the workforce--but hey, if you're one of the 32 million, including government contractors, employed by the state and whose pensions are guaranteed, why things are rosy.

But friends, the government-directed malinvestment can only go on so long. At some point, the debt becomes too large, the taxes too high, and the counterfeiting (what else would you call debasing the currency?) too obvious for the charade to last. The bubble bursts. The biggest question now is who should pick up the pieces.

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