Economic Debacle

Somewhere, a silver lining?

          Economists are singing the blues. Unemployment is up, inflation is down, productivity is up, but the dollar is weak, and nobody knows for sure if we're headed for a deflationary depression, or a hyperinflationary blow-off - the economic equivalent of a supernova.
          "Supply Side" economic policies, introduced by the Reagan presidency, briefly sparked economic expansion. But the spark soon fizzled, and the many veils used since then to hide the awful truth from us have only just begun to fray and fall away. As the cracks spidering web-like through the foundation of our economy emerge, Americans clamor for distractions to take their minds off what tomorrow may bring.
          Dark as the foreboding horizon may appear to be for America, however, we may yet find a silver lining, though there is little time in which to do it. If our leaders do not delay, but take action to put us on a better course right now, not only can America emerge from this scariness stronger and more prosperous than ever, but also as a better, wiser and profoundly more benevolent world leader.

Is deflation a real threat?

          After years of fighting inflation, the biggest threat to our economy now appears to be deflation. But by itself, deflation is not necessarily a bad thing.
          If national production of stuff increases faster than the money supply, prices deflate. That's a good thing. If, on the other hand, people are too poor to buy stuff, and, as a result, prices decline, that's a bad thing. And if, as is the case today, our economy is full of stuff imported from other countries at the same time we are too poor to buy things, that's even worse, because it both lowers prices (deflation) and increases unemployment: a recipe for an economic depression.
          This is why employment is such a critical issue. According to the U.S. Department of Labor, in June the percent of American workers who were unemployed but collecting unemployment insurance, plus those who are unemployed and no longer collecting benefits, plus workers in part-time jobs who want fulltime work, amounted to 10.6%. Add to this the number of Americans who are underemployed, and the number goes even higher.
          To avoid a depression, it is essential to get the employment rate back up. Everybody knows this, Fed Chairman Alan Greenspan most of all. Which is why the Federal Reserve, under his leadership, has attempted to stimulate the economy by lowering interest rates. The results, while disappointing, are no surprise to anyone who follows Peter Drucker, the preeminent management guru.
          According to Drucker, the ability of interest rates to affect the economy is overstated:

"The idea that the Federal Reserve chairman has power is a delusion. The only power he has is over the interest rate, and the interest rate has ceased to be important because businesses are no longer dependent upon borrowing from banks. The interest rate is only important to the stock market, to people that short or buy on margin. For the economy -- yes, if it goes up to 18 percent or down to 2, but half a point is a symbolic gesture." - The Guru's Guru, Business 2.0, October 2001

The validity of Drucker's observation has been demonstrated by the failure of Greenspan's incremental reductions of interest rates to produce the desired stimulus to our faltering economy. Consequently, prices of many goods continue to fall, businesses continue to lay off workers, and the Supply Side fiscal policies introduced under the Reagan Administration have thus far failed to pull us back from the precipice. So what can we do? What's the solution?
          First, we have to understand the true nature of the problem. What it is, where it comes from, where it leads. To do that, we need to narrow the possibilities, know what the problem is not, and avoid chasing wrong answers.

The Disconnect between Suppliers and Consumers

          The problem is not deflation. Falling prices are not usually a bad thing. In fact, ideally we should expect prices to fall, primarily for two kinds of we-should-want-this-to-happen reasons:

• Manufacturing reason: as the efficiency and effectiveness of producing a thing improves, productivity goes up and the cost of producing that thing goes down.
• Economic reason: as supply increases beyond the point where people want it badly enough to pay a high price for it, the price will fall until it's low enough to entice consumers to buy more.

These are the core principles of "Say's Law" underlying Supply Side fiscal policies, which, in theory, should create prosperity. But because of a disconnect between production and supply - more to the point, between producers and consumers - it isn't. Here's why.
          Supply Side fiscal policies assume that both prices and wages will tend to fall, but that prices will fall faster than wages, and that nationally, as production increases, demand for labor will rise, which will help maintain or even boost wages:

"Wages will indeed fall with prices in a deflation, but...expanded production will always mean expanded demand for labor. Drawing off labor to produce new goods bids up the value of labor, which would offset the downward tendency of deflation." - Kelley L. Ross, Ph.D., Say's Law and Supply Side Economics, The Proceedings of the Friesian School, Fourth Series, Department of Philosophy, Los Angeles Valley College

This is the key to understanding why Supply Side policies aren't working: There is a disconnect between production and consumption. That is, the American economy is consuming more but producing less, because employers - the producers of goods - are exporting their stuff-producing jobs to other economies. And producing is an essential part of the Supply Side equation.

"However, if Say's Law is correct, life improves through greater production, not through higher nominal wages. Greater production requires greater capitalization -- money invested in machinery and training -- and the capital for that must come out of profits. Greater production, in turn, means greater productivity -- that fewer workers are needed to produce the previous quantity of goods. But,...If employers must cut prices in the deflation of a growing economy but cannot cut wages to the same degree, what is going to restore their profit margin? The answer is greater productivity. If the workers with higher real wages produce proportionally more for those wages, then the balance of revenue and expenses will be restored." - Kelley L. Ross, Ph.D., Say's Law and Supply Side Economics, The Proceedings of the Friesian School, Fourth Series, Department of Philosophy, Los Angeles Valley College

          Therein lies the rub: Supply Side policies can't work when the supply side is in one country and the demand side is in another. For Supply Side policies to make a nation prosperous, production and consumption have to balance. And as we all know, production - jobs - has been going to other countries:

"As US companies find it expensive to have development work done in America, they seek to take advantage of India's English-speaking software professionals. Several call centers, consequently, have mushroomed in India, creating many jobs. The industry has witnessed a growth of nearly 70 per cent in business process outsourcing." - Nandita Mallik, Jobs lost, salaries cut, but India relatively unscathed, December 29, 2001, quoted in Collapse of Corporate Feudalism?, Rod Van Mechelen, The Backlash!, September 2002

So here is how things stand now: Deflation may soon be a big part of our economy, thanks to the production (mainly by workers in other countries) of an abundance of stuff, coupled with the dwindling capacity of consumers in America to buy that stuff. This dwindling of capacity is due in large part to the exportation of jobs, weak support for labor and declining real wages. Round it goes in a vicious circle, until something breaks. In our situation, because our government is implementing the wrong solutions, that could soon lead us into hyperinflation.

Lead us not into Hyperinflation

          For decades, finance guys, notably Doug Casey, warned that the time will come when the American economy will collapse into a deflationary depression followed by a hyperinflationary blow-off. Sort of the economic equivalent of a star going supernova. First, the economy collapses. That's the deflationary depression part. Then, in a desperate attempt to stimulate the economy, the government fires up the printing presses and starts dumping money, which leads to the debacle Germany suffered in 1924, with the sad images of people buying a loaf of bread with wheelbarrows full of nearly worthless money:
          Despite decades of wailing that the sky is falling, however, the sun still rises every morning, and the possible parallels between the American economy today and the way-back-when German economy, with ultra owie inflation, just haven't materialized. Yet. Does that mean it won't happen? Maybe not. Maybe it just means that, so far, our policy guys have successfully juggled all the things that need to be juggled in order to keep the big bad at bay, but that someday - maybe next day - they will be able to juggle no more, and the whole thing will come crashing down. Or hyperinflate, in our case:

"While the German experience was compressed over a few short years, ours has been more protracted. I think this has occurred for two good reasons: First, American central bankers have learned enough from the German experience to delay and extend the consequences of printing too much fiat money. Second,...German deficits had to be financed internally --- an impossibility which greatly accelerated the printing of fiat currency." - The Nightmare German Inflation, Scientific Market Analysis

In those two respects, we've been sitting cozy, though with some dread that doom one day would come knocking. And now, that time of knocking may be drawing near:

"[L]ow interest rates, and a growing fear among G-7 nations that U.S. deficits are out of control, has greatly curtailed foreign bond purchases. The Fed has been forced to monetize an ever larger portion of the debt as a result. This is the modern equivalent of "printing money"....deficits lead to inflation and uncontrolled deficits lead to uncontrolled inflation. Whether or not there will be a Nightmare American Inflation remains to be seen." - The Nightmare German Inflation, Scientific Market Analysis

          To put things in darkest hour perspective, here's how the nightmare appears to be unfolding: The first thing President 43 did upon his inauguration was to cut taxes. But because multinational corporations have been exporting jobs like a bat out of hell since before Reagan did "not remember that," nothing much happened:

"The number of Americans filing claims for jobless benefits climbed to a five-week high last week, a fresh sign that businesses are still of a mind to pare down rather than bulk up." - Jeannine Aversa, The Associated Press, Rise in jobless claims confounds the experts: Poor job market, sales growth called signs of struggling economy, Seattle Post-Intelligencer, Sunday, July 11, 2003

Meanwhile, to finance America's Perpetual War for Perpetual Peace, the Commander in Chief is running up the deficit, which is inflationary. Historically, making war and running deficits fires up the economy, but it won't work this time. Why? Because so much of what we buy comes from someplace else, from another country where American multinational corporations have spanking new factories run by spanking cheap labor. And the money we spend on the stuff produced by all this spankage does virtually nothing to create more jobs in America:

"Today, the broad consumer price index is rising at a 2 percent annual rate. That level once made us worry about future inflation....Currency in circulation is up more than 6 percent. Federal Reserve Bank credit has increased more than 10 percent in the last year. Foreign central bank holdings of U.S. government obligations have ballooned more than 20 percent in a year." - Scott Burns, Syndicated columnist, The dollar's downward spiral goes on: Real life is stranger than fiction, Seattle Times, Sunday, July 06, 2003

So the Corporate Aristocrats benefit, because their richness grows regardless of what country their riches reside in, but we don't. Dammit, podner, now what'r we gonna do?
          What is there that a president can do? With few options, whether a besieged Bush desperately trying to make good on Campaign 2004 promises, or his successor, given that the two main political parties more or less live to serve the multinational corporate interests, nothing the President is willing to do is likely to work. This is because, according to Say's Law, the value of money is determined by what an economy produces, and if our economy is mostly producing services for corporate aristocrats, we have less value to offer the rest of the world, and so our money is worth less on the global market.

The Global Market is Key

          The global market is key to why Supply Side policies are failing to sustain American prosperity. Back at the beginning of Reagan's presidency, it was swell. But then, the labor market headed south, north and east, severing the relationship between cutting taxes for the rich and producing more and better jobs for the rest of us. It's as if cheap labor is pouring into the country, only in reverse, but with similar consequences:

"What if people poured into the country and production didn't change? This could hardly happen unless the addition to the population remained unemployed. However, if somehow the addition to the population was absorbed into the workforce, and if production did not change, then two things would have to happen: (1) wages would fall, and (2) productivity would have to fall also. Thus, the same quantity of production would be produced by more labor and would be distributed among the larger population. Wealth per worker would decrease, and technology would have to decline, as production becomes more labor intensive rather than capital intensive. This situation could not occur unless the technology were somehow declining, despite growth in population, OR if we had some sort of collapse in the existing economy and money supply, relative to stable population." - Kelley L. Ross, Ph.D., Say's Law and Supply Side Economics, The Proceedings of the Friesian School, Fourth Series, Department of Philosophy, Los Angeles Valley College

          In effect, rather than people pouring into the country, America's jobs have poured into other countries. Which leaves the money freed up by tax cuts and artificially injected by deficit spending with nowhere to run, nowhere to hide, except in the form of an inflation which may lead future historians to talk of the time when Americans bought their loaf of bread with a wheelbarrow full of money.

The rise of a new fascist state?

          Everybody knows the danger inherent in using the printing presses to pump money into the system: In 1914 Germany went off the gold standard. Beginning after the war, in 1920, price inflation began as the German government, burdened by debt, began printing money. The hyperinflation that followed, from 1922 through 1923, is legendary: Hitler rose to power during this period.
          Many have worried that the Bush presidency is leading us toward a new dictatorship. A "Nazi America," of sorts. Indeed, I have been among them. I no longer believe, however, that Bush or any member of his cabinet is likely to fill that role. They are too closely associated with the problem, too likely to be blamed, to turn this to their political advantage. Instead, the threat will come from one who can turn our adversity to good political advantage. One of Bush's opponents in 2004, perhaps.
          The only thing that can save us are jobs programs, like the ones that helped ease the suffering during America's Great Depression. Ironically, we had a dandy jobs creation program going until employers caught on to the idea of exporting jobs overseas. But for a jobs program to be truly meaningful, it will have to provide more than make-work projects. We need manufacturing jobs on a massive scale. And that will be a hard sell for any president, President Bush most of all. Maybe he needs to shoot for the moon.

Is our silver lining on the moon?

          An abundance of new jobs may be created by an aggressive space program, one focused less on exploration than exploitation. Happily for us, the "how" has already been written: Years ago, Gerard K. O'Neill, professor of physics at Princeton University, along with a team of students, came up with the intriguing idea of building a space colony in orbit between the Earth and the Moon.
          Constructed from material mined on the Moon, the space colony - dubbed the L5 Colony for its astronomic position in space - would house factories, laboratories, and act as a launch pad for further exploration. In addition to the economic stimulus such an endeavor would have on the American economy, indeed, the economy of the whole world, it would provide a number of additional benefits, including:

• In space, many industrial pollutants might actually be valuable commodities rather than a blight upon the Earth, because, in an environment where material is rare, even pollutants can be used for something.
• Launching expeditions to Mars, and other parts of the Solar System, is cheaper from orbit, because excessive amounts of fuel are not needed to overcome the Earth's gravity.
• Where current space stations produce little of economic value and are, therefore, an expensive scientific luxury item, a colony would not only pay for itself, but produce huge economic windfalls.

          Lunar mining operations and factories in space would produce prosperity on a global scale. A silver lining, indeed. But there are other, earth-bound initiatives which also would go far toward stimulating the economy. The most exciting may be Mary Tolan's strategy for converting us to a hydrogen-based economy.

Hydrogen Economy

          Mary Tolan believes oil companies and auto manufacturers should put shoulder to the boulder behind converting our cars, trucks and buses to hydrogen fuel cells. This is not a new idea. What is new, is that Tolan is an industry insider, and she's selling the idea on its economic rather than environmental merits:

"The payoff on making those hydrogen bets is potentially immense, in Tolan's view. Hydrogen producers would be in the enviable position of creating a vast commodity market from scratch. It turns out that hydrogen is relatively cheap to extract from natural gas; that gives it a built-in 40 percent cost advantage over gasoline...Tolan projects that hydrogen investment returns could far outstrip the current 11 percent average ROI in petroleum businesses." - Ralph King, Mary Tolan's Modest Proposal, Business 2.0, June 2003 Issue

Replacing the Oil Economy with a Hydrogen Economy would be a boon to industrialists, for whom the payoff would be immense, American consumers, who need the jobs such an undertaking would create, and the world, for whom cheap, clean fuel would provide both economic and environmental rewards. We should do it.

Silver Lining, or Dark Nightmare?

          The choice is there to make. We can continue on our current course, and our day of reckoning will soon be at hand. Or our president can suck it in, make the hard sell for radical policy changes, and go down in history as the president responsible for saving America while simultaneously setting the stage for global prosperity on an unprecedented scale.
          That the choices must be made is beyond denial. The only question is, will President Bush have the courage to be the man to make it happen?

References and Recommended Reading

• Say's Law and Supply Side Economics, Kelley L. Ross, Ph.D.
• The Guru's Guru: A lively conversation with Peter Drucker, dean of the deep thinkers. By Erick Schonfeld, Business 2.0, October 2001
• The Nightmare German Inflation, Michael J. Kosares, USAGOLD, 2002
• Mary Tolan's Modest Proposal: A rising star at Accenture is advising Big Oil and the auto industry that they can revitalize the economy, mint profits, and save the planet -- if they'll just learn to stop worrying and love hydrogen. By Ralph King, Business 2.0, June 2003
• High Frontier: Human Colonies in Space [Book & CD-ROM], by Gerard K. O'Neill, Freeman J. Dyson (Introduction)
• Islands in the Sky: Bold New Ideas for Colonizing Space, Edited by Stanley Schmidt and Robert Zubrin
• Mining the Sky: Untold Riches from the Asteroids, Comets, and Planets, by John S. Lewis