The illusion of prosperity under central banking

Robert Murphy, Hans Hermann Hoppe, Ron and Rand Paul, Peter Schiff, Harry Dent, Michael Burry, David Stockman, Jim Rickards, etc.: these are just some of the influential Austrian economics-educated figures who have vehemently protested the past decade-plus of economic policies in America.  Their voices have been drowned out by the droves rooting for Obama and fixated on the “change” and “hope” platitudes that have been tossed around in his many speeches.  Little do they know that the central banking policies propped up under the Obama presidency have created nothing more than a band aid on a growing tumor.

What’s happening with employment and debt? If you’ve been inquisitive enough to question national unemployment numbers I’m proud enough of your performance to give you one gold star sticker, which is worth about as much as the money printed by the Federal Reserve…  Real unemployment is measured by the U-6 and probably shows an even bigger picture through the “labor force participation rate.”  While official unemployment statistics are shown to be around 4.9%, the U-6 is around 9.9% and the labor force participation rate even worse, showing only 63% of working age adults somehow involved in work.  That means 37% are no longer even pursuing work.  This figure has decreased steadily since 2007 from 67%, while the unemployment figures that are reported by the Fed and the Obama Administration have shown the complete opposite…  The ruse is up.  Our lower and middle classes are saddled in debt while lacking any gainful employment

What’s happening with the Fed and Banks? The Federal Reserve’s primary goal since 2008 has been to create a spending-rich environment through low interest rates which would then be balanced out by an eventual rise in interest rates (higher interest on bank accounts means more consumer savings).  So what actually happened?  The Fed launched two measures that were supposed to boost spending: 1) lowering interest rates by lowering the rate at which banks could lend each other money (usually overnight) and 2) quantitative easing: the mass purchase of treasuries and other securities by the Federal Reserve with a stream of yearly cash flows by means of creating money out of thin air.  It sounds ridiculous because it is ridiculous.  By purchasing massive amounts of bonds through QE and lowering interest rates, would-be bond buyers had few options are were forced to accept miserable yields.  Consequentially, wealthy investors looked to park their investments in higher yielding speculations such as stocks.  The years from 2009 to 2014 marked one of the most odd, consistent increases in stock prices in history.  If it looks too good to be true it’s because it is.  Price-to-earnings ratios are through the roof in some industries where investors have over-speculated.

Where it’s headed from here:  The lower classes have remained financially weak since the crisis because little value has been created in terms of actual production and manufacturing jobs.  The following analysis is my own assessment, and I would appreciate criticism of these assumptions: The stimulus package worked the way any Austrian economist would have told you it worked: it created finite value by means of taking other peoples money.  A road construction job only lasts so long.  Krugman argued the stimulus should have been larger, which makes sense, but I am confident the vast majority of these government stimulus programs create very little value.  Wind energy?  Cash for clunkers?  Road construction?  I mean how many of these jobs can you reasonably expect to sustain the lower classes of the U.S. economy?  Krugman thinks these stimulus jobs initiate a healthy pattern of spending but it obviously fell short: banks aren’t making loans to consumers anymore because their stimulus jobs and part-time work as Starbucks cashiers aren’t creating any spending opportunities. Because consumers aren’t spending the stock market has stalled.  Quantitative easing has stopped, which means speculation on the stock market has to stop.  Loans to consumers have stopped because they don’t actually have any money.  The entire system has just… stalled.  People aren’t spending money anymore and this has terrible consequences.  Paul Krugman seems to believe infrastructure spending is a panacea, whereas real, intrinsic value is created through a healthy manufacturing sector, or at the very least, companies that keep their operations on American soil.

A lack of supply-side economics: Peter Schiff characterized it so well when he said Americans are getting China to buy our treasuries so that we can go and spend money on goods made in China.  The overall hollowing out of the manufacturing economy in America has made us a nation of spenders who don’t actually produce anything.  We have intellectual capital and lots of land, but where is our manufacturing economy?  Where are the great steel factories that line the Great Lakes?  Over the years, manufacturing has been steadily outsourced due to excessive regulations, union presence, and ridiculous rates of taxation.  This talking point has been misconstrued for years with Democrats claiming we simply can’t compete with third-world labor rates.  The truth of the matter is that once you take into account significant decrease in quality, setting up shop, and extra transport costs, the benefit of manufacturing overseas is not that much greater than the cost.  Just lowering corporate tax rates alone would prevent so many corporate inversions that have happened in recent years.  Is it any coincidence that the strongest manufacturing centers in America are in Tennessee, Mississippi and Georgia where unions are the weakest and tax rates are some of the lowest?

So what’s the international consequence of our excessive spending and lack of productive capability?  China will look towards slowing US treasury purchases while anchoring their currency around a gold standard.  They clearly realize this is in their own best interests because it provides an intrinsic value to their currency that won’t inflate.

The smartest idiot in the room?: The American economy is partially held together by the fact that we are one of the least screwed-up countries in the world.  Where else will investors put their money?  Russia?  Argentina?  France?   It’s true that we are one of the smartest idiots in the room, but that can’t change the fact that we have serious internal structural issues.  Our lower and middle classes are hollowed out, plain and simple.  At some point the Federal Reserve will come clean and reveal their hand.  It’s going to show poor job growth and low economic output.  We have to revamp the entire system if this is to work properly.  Food for thought: the last president to pay off America’s debt in it’s entirely was Andrew Jackson, the guy who was removed from the 20 dollar bill last week.  Is this symbolic or what?

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