The populations of the USA, the EU, and Australia are saturated with debt, their attempt to maintain living standards using debt to augment stagnant income, reached it's limit in 2005. The housing crash and global financial crisis which followed, mimic closely economic crashes going back to the tulip bubble, the south seas bubble, the panics of 1837, 1873, 1890, and the great depression of 1929-1932. The dynamics first elucidated by Irving Fisher and refined by Hyman Minsky, into the latter's "instability Hypothesis" are playing out on the world stage.
Despite 8 years of essentially free money, with interest rates of essentially zero %, unemployment remains higher than 23%, and job creation is limited to low paying retail jobs, in tandem with job losses in the high paying industrial sectors. Lacking increases in demand, business refuses to invest in plant expansion, with equipment purchases limited to those reducing costs, and improving productivity, with large firms using cash to support share price, via share buy backs.
In 2007 70% of consumer spending was debt financed, in 2008-2009 this declined to 58% and adult male employment declined to the level of 1996, leaving 23 million jobless, which is a true unemployment rate >22%.
In 2015 60 % of US GDP came from the FIRE economy, leaving a real economy of 6 trillion, of which 400 or so billion represents markup on imported goods, (walmart), giving a classic GDP of 5.4 trillion. This compares to Chinese GDP of 12 trillion. Chinese GDP is expanding at 7% annually. By 2017, Chinese GDP will exceed 15 trillion, and given ongoing debt deflation in the US, it is reasonable to expect US classic GDP to decline a further 10%, to 5 trillion. This explains the recent assertiveness on the part of China. The Chinese real economy exceeds that of the US, and given their financial position as world creditor, it is the Chinese who will, via their capital, dominate the world economy.
To understand what is happening, it is first necessary to discard NeoClassical Economics as little better than voodoo, and return to the Post Kenesians, such as Fisher, Minsky, and Keen, with healthy doses from the Circuitous School, exemplified by Liu.
In a modern fiat money economy, such as that of the US, banks function as intermediaries in all exchanges. The amount of barter is negligible, and can be ignored. Specifically a debt is paid by a transfer of credits from the payee's account at the bank to the account of the vendor. This does not involve the transfer of any physical item.
Under the current fractional reserve banking system of the US, bank's make loans by creating credits in the account of the borrower, which the borrower spends identically to money. In fact credit functions as money in such an economy, and a restriction on debt creation has the same effect as reducing the money supply. This is a key feature of the modern economy, ignored by NeoClassic economists such as Greenspan, and Bermanke.
Their focus on holding wages constant, in the inflationary environment they created over the last 30 years, meant that the share of purchasing power accruing to labor declined, and was replaced by debt. And, once the credit bubble collapsed, debt creation collapsed with it, demand for products dropped, unemployment soared, and bankruptcies ballooned.
This process is still ongoing, despite trillions of stimulus put into the banks, and the record of previous debt bubble collapses shows that once started, the process continues until debt is ~ 50% of GDP. The inquisitive among you may have noticed that the debt / GDP ratio has widened, which occurred because GDP dropped faster than debt. This was a feature of previous depressions, and the record of 29-32 shows that a return to full employment(WWII) accelerated the process of debt destruction.
Is this time different? For various reasons, it is, and it is not.
The retiring baby boom generation, will accelerate debt deleveraging, because retiring folks are scaling down, their incomes are declining, and their numbers are sufficiently large.
The current dysfunctional state of capital formation in the share markets, means that small firms, those like specialty manufacturer Hennig Broach, with less than 50 employees, cannot raise equity to pay down their debt. The strongest of these will pay off debt as fast as possible, cutting their work force to do so, and the rest will go bankrupt, and default on their debt.
The Fed has focused on rescuing the banks. In doing so, they left households and small business to shift for themselves. Since economic activity flows up from the bottom, the foundation of the economy was left to crumble. Things have progressed to the point that business finds itself without customers, and households find themselves without income. People without income cannot buy anything, and do not pay debts, and firms with no customers reduce their overhead, including employees, as they attempt to survive..
The buttons on the left of this page permit the inquisitive to download 20 seminal papers from our library. We particularly recommend those from Dr. Keen and Piscatqua Research, because both sources predicted the GFC before the housing bubble broke, and use numerical analysis to estimate the depth and duration of the ensuing deflationary collapse. :
In our Alternative Tax proposal, we show how Treasury could generate $ 3.8 trillion in tax receipts, while eliminating Income Tax.
Our proposal modifies Social Security so it really does become a social safety net, by eliminating restrictions and qualifications, the administration of which create needless overhead, and increasing income support to $20,000 per household for working age families, and $ 30,000 per household for retirees. This immediately takes business out of retirement funding, reducing their overhead to world levels, it reassures those approaching or at retirement age so they will retire and make jobs available to younger workers..
We propose a single payer health system on the French model, with premiums set at $ 2,700 / citizen - year, and premiums paid by households, not business. This immediately takes business out of health care funding, reducing their overhead to world levels. This level requires streamlining the system via elimination of the indirect payment system, reduction in medication costs through mass purchase, and an emphasis on preventive medicine.
We propose to deal with high unemployment among young adults aged 18 - 24, via a national service scheme costing $ 100 billion annually. Our proposal would take them off the streets, provide them room and board and $400 per month in spending money. We envision building a citizen army, planting forests, restoring grasslands, controlling erosion, policing communities, caring for the aged, rehabilitating fisheries, harvesting fruit and vegetables, modernizing the rail system, and other essential tasks now delegated to immigrants.
We propose dramatic, immediate recognition of the discounted value of debt securities, via a Treasury sale of $100million of them to establish market value. We believe they will bring 1% of notional value, thus setting in motion an orderly liquidation of insolvent banks via the FDIC mechanism and the bankruptcy statutes. As part of this, Treasury could take custody of the nearly worthless paper, and offer the debtors backing same to buy it back, at say twice it's market value. If on average household, commercial, and corporate debt has a market value of 5% of notional value, the 35 Trillion notional value could be bought back at 3.5 trillion by the debtors, giving Treasury & FDIC 1.75 trillion to fund the liquidation process. This mechanism could collapse the debt bubble in an orderly way within months. Given consumer / business debt level of 3.5 Trillion and a Federal Debt level of 11 Trillion, the ratio would still be excessive at 100% of GDP, but the ratio of private debt to GDP would be a sustainable 25%.
Doing this would free up the 12.% of GDP currently allocated to debt service, sustainably boosting economic activity.
We advocate the Federal government to take the following further measures:
A feed in tariff for renewable power targeted to replace the existing power mix with 800 Gwe of wind. 160 Gwe of geothermal, 160 Gwe of hydro, and 200 Gwe of solar power production, paid with Carbon Tax revenues
Legalization of drugs and a complete close down of all agencies associated with the "war on Drugs"
Ending the wars replacing Full Spectrum Dominance with diplomacy, and reducing DOD's budget to 50 Billion.
Electrifying and double tracking 56,000 miles of mainline rail
Elimination of Homeland Security, the PATRIOT act, and all the other Orwellian legislation of the last 30 years.
Using these methods and others, would further improve the sustainable level of economic activity in the US, while rebuilding the nation.,
What Current Conditions Portend:
The current policies of the US Fed, provide savers with little reward for their frugality. This is intentional, but will fail because the population knows it must have a financial cushion for the uncertainties ahead.
Unlike previous depressions, commodity prices have not collapsed. Demand from the BRIC countries, is stressing limited supply to keep metals and agricultural prices firm, it is unlikely that agriculture will take the big hit it did during the dust bowl days as long as this continues.
Peak oil means that oil prices can be expected to remain firm and to rise into early summer, possibly approaching $100 per barrel, further stressing households.
The current Production Tax Credit regime, and other grants and rebates make this the year for renewable projects, IF THEY CAN GET FUNDING.
The current interest rate regime, created a large cohort of savers seeking yield via extremely risky investments, who should be extremely interested in 6% returns from well run and properly capitalized energy projects.
This means that community power projects, those conceived by and benefiting a community, whether a rural town, a commune, condominium, University Campus, Industrial Park, have a very high chance of success. Now is the time to get organized. Now is the time to call or write us. Renewable power can be the birth industry of this recession as aviation was during the last one.
The economies of the United States, the EU, Japan, Australia, and much of the developed world are in the early stages of debt deflation.
Public Research Institute's, world wide operations give it a unique perspective on the changing economic leadership of the world.
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Social Security Destruction:
There are 24 million Americans aged 55 - 64, who are either retired, or eligible to retire within 5 years. There are 26 million unemployed. It is very unlikely those eligible will retire, while Henry Paulson, etal. Continue to threaten their retirement security. Would you? Yet, it is vital that these people retire and hand their jobs off to a younger person currently without work.
35 million Americans do not have health insurance. Forgotten in the debate is the fact that most, if not all of them, lost their insurance coverage due to job loss, or medical condition. Forgotten is the real risk of this large group developing and vectoring a serious disease out of control into the rest of the population. Unknown is how single payer health schemes in other countries work, and provide care at less than half the price of care in the US.
Were the US to adopt the French system, costing $2700/citizern annually, at $800 billion, this system would cost 90% of that the US Federal Government now spends on health related matters, and would cover everyone! This would eliminate the need for state and local expenditures, and for work related expenditures.
At a time when States, Counties, and Businesses are hurting, this one act could make a difference.
The Great Bank Slush Fund:
The US piled between 1.6 and 4 trillion into the large banks. For that sum, the country got the carry trade, where much of the money went to Singapore and NewZealand to capture high interest rates, and virtually none went into financing projects in the USA.
That sum of money could have:
||Put all young people between 18-24 (thats 12 million of them) into national service for 16 years
||Built 800 Gwe of wind turbines.
||Double track and electrify 56,000 miles of railway mainline ( 2000 billion ) to save 6 Mbbl/day imported oil costing $600,000,000 / day or $ 200 billion / yr.
||Provide $30,000/ yr to each retired household and $20,000 /yr to each unemployed household for 2 years.
||Reconstruct the IntraCoastal Waterway and upgrade the river barge system
||Build 160 clinic/hospitals costing $ 10 million each per county
||Convert all 6000 existing dams to produce at least 2 Mwe of hydro electric power (36billion) and install power stations on all high head sites in the USA to produce 150 Gwe of hydro electric power.
||Construct 400 Gwe of hot dry rock geothermal power plants.
Any of the above would put millions to work. Currently the US has 63 Gwe of electricity generaton capacity, so many of these projects would completely replace the existing system using nuclear, hydro, coal, and oil with renewables. If the country can afford Trillions to bail out a bunch of shyster bankers, seeking rent from the rest of the economy to line their pockets with millions, why not put the money to work rebuilding the stuff everyone uses every day?