ECONOMIC MYTHOLOGY
By: Jim Willie
In ancient Greek and Roman times, mythology
served a strange but valuable service. First,
it channeled pervasive belief in spirituality
and deity in general, beyond the mortal world.
Second, it cooperated with the sense of
individual human helplessness by putting
structure to the higher powers. In today's day
and age, we have become fixated on the spirit
of money and what it buys in the way of
possessions, entertainment, and leisure. Here
too, the individual is dwarfed more than ever.
The powers that be have assembled a structure.
The apparatus consists of a truly bizarre and
frightening intertwined network of derivative
gears, intervention devices, bank lending
methods, mortgage finance centrifuges, stock
equity conversion means, promotion systems,
and advertisement conflict of interest. The
spin for the system is a complex series of
economic myths, not unlike the great Greek
mythology that endured centuries. The American
version is certain not to last as long. When
complex systems begin to fail, as the US
Economy surely has since the 1980 decade, the
system absolutely requires a convincing
mythology to serve as unquestionable dogma.
Ponzi outlined the importance of dogma to
perpetuate a system gone awry. In the United
States, a complex system has emerged with
irrational beliefs which have no bearing on
reality. We have the Oracle of Delphi in the
Federal Reserve, whose spokesman is Chairman
Alan Greenspan. Despite his constant stream of
errors and fallacious analysis, he is looked
to for counsel as a precious seer. Mount
Olympus is the Austrian School, whose
teachings have been ignored since the Bretton
Woods divorce in 1981 with tragic
consequences. That divorce opened Pandora's
Box, without question. Partygoers rarely visit
the mountain, too busy in celebration. Zeus is
Robert Rubin, architect of the Strong Dollar,
whose power and luster has surely diminished.
His wife Hera might be the Japanese central
bank, which lifts him whenever he falls on his
face, and stumbles in sleep walking overnight.
Achilles, the great warrior, is the US
Military ready to do battle to defend Greece,
the US-centric world of commerce. Powerful
Atlas might be JPMorgan, unable to hold the
world of derivatives atop his strong
shoulders. The many nymphs prancing about,
exploiting their sexuality, are the money
lenders, whether bank leaders or car dealers
or electronics merchants with their sexual
front. Chief among them is beautiful
Aphrodite, embodied in Fanny Mae after it rose
from the 1989 Savings & Loan debacle out of
its restructured ocean foam. Helen of Troy
might be the wonderful US mfg base, long gone,
not exactly taken, but not yet desired back.
Poseidon, god of the ocean, clearly is Wall
Street which governs the sea of capital and
debts. Brokerage houses urge money infusions
from the public much like the Sirens, as they
lured sailors to the rocks and wreckage.
Diana, the goddess of the hunt, might appear
with corporate initial public stock offering
launches, arrows flung into the equity
markets. The satyrs chasing nymphs are
household consumers, who find themselves
thoroughly spent after satisfying the loan
terms. Ulysses is Joe SixPack, who struggles
mightily, and less certain to enjoy the
success of the ancient Greek sailor. Medusa,
the serpent lady with snakes as hair, turns
men to stone in much the same way that
bankruptcy does. The grand odyssey involves
negotiation between Scylla and Charybdis. The
multi-headed monster dog Scylla lurks like
inflation, easily dragging its prey into the
cave of value erosion and debt writedowns. The
dreaded giant whirlpool Charybdis has already
begun to show its power, as secular deflation
circulates in its cycles. China commands the
whirlpool's bamboo stirring spoon, as it
limits wages and prices. The Chinese yuan
currency peg serves as a Trojan Horse, taken
in by our economy, only to wreak horrendous
damage, but not yet recognized. The modern
American economic mythology is soon to turn
into a Greek tragedy. The system has become
unsustainable and begs for correction.
THE NATURE AND ROLE OF MYTHS
Today, the Macro
Economy Myth is under siege, a certain quiet
attack. Currently at work is the third in a
long list of myths used as mental glue to hold
together the internal mechanisms of the US
financial system, to maintain foreign
confidence in our markets, and to attract
enormous sums of capital on a daily basis to
keep both Wall Street and the US Economy
going. The petro-dollar foundation, the basis
of world commerce, has been shaken in the last
two years. It is fortified at irregularly
timed interventions by foreign central banks,
without which sudden swoons in currency
exchange rates and sudden rises in interest
rates would deliver massive shocks to real
economies around the globe. The petro-dollar
is complex, fully intertwined with
geopolitics, with banking & monetary system,
with financial markets, and with international
commerce. A quick dismissal of its importance
by economic pundits is absurdly shallow and
recklessly na?Øve. It is most likely linked
with military motives. In the 1970 decade, the
United States began on a course which altered
modern history. Following the Bretton Woods
divorce between the USDollar and gold,
commitment toward social programs, war effort,
and collectivist sponsored home ownership
deepened the departure from true money. Public
and world embrace of myths are of central
importance in order to buttress a foundation
of false money. World commerce is undermined
if only the masses recognized the foundation
of the unbacked USDollar as untenable. Since
when does US Treasury bond issuance provide a
legitimate countervailing force to physical
crude oil? Buying energy supplies with gold
might be impractical. Buying energy with debt
securities, however, goes beyond insanity.
Myths perpetuate because the monetary system
cannot stand on its own merits. The USDollar,
since 1971, has not been backed by gold. By
default, it has in practicality been backed by
USTBond debt. The flipside of the USDollar is
a USTBond, which is a soft sand foundation for
any economic house to be built. The first
great myth was motivated by the need for
stimulus, to remove the US Economy from the
worst recession endured since the Great
Depression. Saddled by enormous ground swell
of costs from higher energy prices, amplified
by growing head winds from the rising costs of
federal social programs, the nation and its
Congress had to be convinced of the first
myth. We have proceeded from one myth to
another, hopelessly unwilling and unable to
accept the tragedy of the divorce of the
USDollar from its golden anchor. All world
financial crises can be traced to the Bretton
Woods divorce. Public economic policy has
become commandeered by adolescent guesswork,
abandoning a century of European experience,
making it up as we go along, experimenting
with the world as its oyster, in a reckless
game where economists cannot prove their
theories. They have done nothing but destroy
the system.
1. 1 SUPPLY SIDE ECONOMIC MYTH
(TRICKLE DOWN) Eight years later,
President George H. W. Bush would get it
right, when he called it "Voodoo
Economics." During its day, it was
embraced with some hesitation, as few
options seemed available on the political
table.
President Reagan, armed by theories from
Laffer, urged on by Pentagon defense
contractors, convinced Congress, tacitly
approved by the public, to sponsor tax cuts of
magnificent size and to recommend
unprecedented military buildup known as the
Strategic Defense Initiative (aka Star Wars).
The reasoning was that massive stimulus in
money supply, both in the private corporate
sector and in the public defense sector, would
engineer economic growth, lift wages, and pull
us out of recession. Eventually, demand would
match supply, stride for stride. Myth #1 is
the Supply Side Economics known as
Reaganomics. While the US Economy did emerge
from the tight grasp of economic stagnation in
the mid-1980's, the myth was unmasked a
fateful day called Black Monday. Stocks,
housing values, and the USDollar had all
continued to rise for well nigh a full year,
even as interest rates had ratcheted upward to
serve warning. The warning was not heeded; the
system built upon debt was sent reeling. A
Pyrrhic Victory had been won. We did emerge
from recession, but with crippling federal
debt, which had risen by $2000 billion under
Reagan. Many regard the price as worth it,
since its investment buried the Soviet Union.
Little did Supply Siders realize that seeds
were being planted to trigger secular
deflation, as debt collapsed and production
came into over-supply. Asia was the grand
beneficiary of an acceleration in trade
surpluses, used fractional banking practices,
built up it manufacturing base in magnificent
style, and prepped the day for the Asian
Meltdown ten years later. Supply Sider
principles had earned the nation an extra $2
trillion in federal debt, huge Asian
production capacity, and a fresh troublesome
lingering recession from 1988 to 1992. A stock
bear market, coupled with a housing decline,
left the economy in tatters. Yet the myth
prevails to this day as a success.
Underpinning the Supply Side myth were several
construct beliefs, all laughable but held
firm. We had the NAIRU, non-accelerating
inflation rate unemployment, which claimed
that a jobless rate under 5% was innately tied
to higher price inflation. The Phillips Curve
put a mathematical face on this absurdity, as
it formalized the mythical relationship
between the two factors. When that failed, the
line was drawn at 4%. We employ better methods
now. We simply measure a participation rate,
which counts the number of people excluded
from the employed. The jobless rate merely
measures those receiving state benefits. By
removing federal extensions for jobless
benefits when those benefits become exhausted,
the jobless rate fell, a certain political
benefit. The Laffer Curve expects higher tax
revenue from higher tax rates in a direct
response with no reaction. It also expects
higher tax revenue from much lower tax rates
in an exercise in powerful elasticity. In
other words, tax collection receipts benefit
regardless, have the cake and eat it too. How
incredibly silly, but widely accepted. Budget
Director David Stockman was a certain
charlatan, as he sold the idea, later changed
his numbers, but Reagan used an erroneous
numbers anyway in an historically hilarious
Keystone Cop event. Evidence of the failure of
the first myth is the abandoned mfg base, a
1987 Black Monday stock bust, a 1989 Savings &
Loan disaster, and the birth of the Plunge
Protection Team. The most damaging symptom to
this myth was the rise in the USDollar in the
middle of the 1980 decade. In reaction, the US
manufacturing base gradually went sent
offshore to Asia, first to Japan, later to the
Pacific Rim where the Asian Tigers reside.
Back then our cast of economists was much more
competent. They realized the removal of the
mfg base meant lost jobs, lost wages, and
national impoverishment. Today we know better
!?!?! The Plaza Accord was agreed upon by the
industrial power finance ministers. It was
intended to reduce the value of the USDollar,
in order to encourage a return of the US mfg
base. While the US$ was steered lower, the
labor cost difference between Asian and the
USA could not be addressed by currency
adjustment alone. Their labor costs are
between 5 and 20 times lower than inside the
USA. The mfg offshore movement continued, only
to accelerate ten years later.
1. 2 NEW ECONOMY MYTH
(TECHNOLOGY MIRACLE VIA PRODUCTIVITY)
Unlike the previous cycle, the Federal Reserve
played
a major role in what came next. The name
Clintonomics never caught on, nor did it have
much meaning, for good reason. No significant
planks of public policy were urged on by
President Clinton. The entire nation was
gripped, nay infected, by the notion that
advances in technology had paved a path to
greater corporate profitability through
enhanced productivity. Financial markets and
new patterns of investment behavior were the
dominant themes. The tech miracle had really
changed lives, lowered prices, but not aided
earned greater profits. Myth #2 is the New
Economy powered by technology and
productivity. Not only was the trend in
corporate earnings in a severe downtrend, but
productivity had been superior in the previous
decade. Stock valuations were unsustainable,
unjustified, and ultimately collapsed. Savings
disappeared, as stock accounts were considered
savings. We bought on credit, powered up our
credit card debt, and considered ourselves all
wealthy from inflated assets. We earned
ourselves the greatest stock bust since the
Great Depression. In the wake of the 2000
stock bust, a recession came soon afterwards.
The Fed, led by Chairman Greenspan, had been
the myth's greatest proponent and cheerleader.
To this day, his reputation and public
confidence in him have not been marred, which
is an even greater miracle. Rubin Strong
Dollar Policy was reckless, totally in
contradiction to prudent Plaza plan, and a
firm betrayal of the American working class.
Of course, he and the Fed represent interests
of the banking aristocracy. Household debt
rose all through the decade. Dependence upon
inflated asset values grew. Imports from Asia
became a constant fixture in our economic
landscape. More to the point though, the heart
of the myth was false. Corporate profits
peaked in 1985 and have trended down for two
decades. Productivity, the real surprise,
actually has been falling since 1990 despite
certain technological developments. We all
know about cell phones, fiberoptics, broadband
connectivity, internet commerce, fast PC's,
cavernous storage devices, and breakthroughs
in medical research. It has not translated
into greater corporate profit nor
productivity. Instead, it has resulted in
lower consumer prices, cemented by Asian
production dominance. The US public saw the
technological marvels, as did the
tech-ignorant Chairman Greenspan. As a
cheerleader for our financial markets, the
good chairman worked overtime to sell US
stocks and bonds. He operated as the champion
over price inflation and the advent of
perennial prosperity. Almost all his claims
were revealed as a sham during the stock bust,
but to this day they are still widely believed
as part of a productivity miracle. Today, that
miracle is closely aligned with job loss
through Asian outsourcing. We now import that
same productivity from Asia and its cheaper
labor. The scourge of three decades of
monetary inflation is seen in the form of
heavy debts, lost jobs, and Asian excess
production. In other words, secular deflation
and its massive forces. Evidence of the
failure of the second myth is the 2000 stock
bust, the telecom debt bust, the sharp rise in
household debt, the Enron, Arthur Anderson,
WorldCom, and other scandals. The bubbles have
been replaced with bigger bubbles, and the
accounting & brokerage scandals have not
ended.
1. 3 MACRO ECONOMY MYTH
(INTL CREDIT FLEXIBILITY & ASSET INFLATION
WEALTH) Greenspan boasts that the Federal
Reserve has successfully dealt with the
symptoms of the 2000 stock bust, rather than
provide a lasting authentic remedy to its
underlying problem. This is pure heresy by a
central bank, since a stock and telecom debt
bubble has been replaced by a Treasury bond
bubble, a mortgage finance bubble, a housing
bubble, and a deep dependence by the US
Economy upon housing values and equity
extraction. This he calls "wealth generation"
which any central banker worth his or her salt
rejects summarily. Chairman Greenspan speaks
like a hedge fund manager, not a central
banker. He has become the banking system chief
political spokesman, as he justifies a record
of reckless inflation and debt explosion.
Absence and abandonment of a manufacturing
base, long dispatched to Asia and other parts
of the world in search of lower costs,
resulted in massive trade gaps. Those gaps
have remarkably escalated (a prediction of
mine in spring 2002) despite a declining
USDollar index. Federal deficits have risen,
partly from the economic stimulus of tax cuts,
partly from a war to resist terrorism and to
secure foreign oil supplies. Foreign capital
needs have reached crisis proportions,
currently running at $2 billion per day.
Credit needs are minimized in feeble arguments
by our Fed Chairman in what he describes as
"flexibility" of the macro economy. Myth #3 is
the Macro Economy powered by asset inflation
and funded by the flexibility enabled by
foreign savings. It attempts to justify a
horribly imbalanced US Economy, dangerously
dependent on foreign capital, which lacks
valid income generation from capital
investment, actual production, and wage
growth, rather than financial investment which
hopes for continued price inflation. Several
miracles are in progress: housing prices rose
30% or more nationally instead of falling
their customary 15% following recessions, as
buyers seize on cheap money in mortgage
finance foreign central banks purchase over
35% of USTBonds in order to continue to
support an overly indebted and crippled US
Economy stock valuations continue to march to
the beat of the Fed Valuation Model which
employs a multiplier inversely related to
interest rates\ the public still believes we
benefit from productivity gains No system can
survive for long as it depends on foreign
credit supply in the present magnitude. Asia
has its own credit needs, growing to be sure,
and surely in conflict with their willingness
to supply the US and its voracious appetite.
No system can survive for long when its
depends upon asset inflation as the primary
wealth generating power source. Natural
corrections surely come, and when they do,
immense problems will come to the US Economy.
The foundations of the current myth are far
more laughable than the previous two myths.
Recently, Greenspan speeches center on social
programs being scaled back. He recognizes that
Social Security, Medicare, Medicaid, and other
entrenched programs cannot be funded. He cites
a growing federal budget deficit, which causes
neither alarm nor desire for reduction. In my
opinion, he is actively engaged in a publicity
campaign to create an alibi for upcoming
failures and systemic shocks. Backroom cleanup
efforts must be intense, as the JPMorgan
hedgebook and Fanny Mae balance sheet require
full-time attention. Such undertakings are
kept quiet though, and far from the
undiscerning public eye. JPMorgan and Fanny
Mae stand as vivid evidence of the failure of
the previous two myths. Evidence of the
failure of the third myth is the constant flow
of jobs in Asian outsourcing, the Fanny Mae
mortgage finance faulty foundation, dependence
upon the housing bubble to continue consumer
spending, growing trade gaps, and growing
federal deficits. Denial is reaching
unprecedented epidemic proportions. To be
sure, many symptoms of failure are being
hidden from the public, like the sanitization
of the JPMorgan hedgebook. How could bond
revolts in summer 2003 and spring 2004 have
escaped the world's largest holder of bond
derivatives?
CONCLUSION
Far too little scrutiny has been focused upon
the foundation of the world monetary system, the
petro-dollar. The name "petro-dollar" is used
to convey the critical transaction whereby
energy is priced and purchased in USDollars.
All prevailing myths, both past shattered
myths and current exposed myths, are essential
to maintain the system, to urge on confidence,
to confuse the public, and to deceive
foreigners. The real problem is that the world
monetary standard, the USDollar, has no
intrinsic value. It is not backed by gold or
any other hard asset. The world's largest
economy, in the United States, has become an
inflationary engine, with significant
abandoned manufacturing base, and vanishing
income producing machinery. Its once powerful
wealth production apparatus has been
systematically dismantled in search of lower
costs. What happened to its awesome mfg base
is now in the process of being duplicated in
the vast service sector. The US Economy has
become tragically dependent upon inflation as
a primary power source. In order to keep the
charade going, the nation, its trading
partners, and investors worldwide must be
fooled, tricked, and deceived by myths.
Without such myths, we would be forced to
endure a painful correction to inflated
assets, and be subjected to a severe debt
downgrade. The consequence would be a grand
decline in the standard of living for most
American households and citizens. The world
economy depends too much on our spending, even
if that spending is led by evermore debt in an
overly burdened debt environment. In all
likelihood, the world economy would enter a
deep recession, or worse. So maintaining and
perpetuating myths is essential. The better
questions remain: When will our inflated
assets (stocks, bonds, housing) correct
downward in price ??? When will Asians grow
tired of exchanging their industrial output
for risky debt securities ??? What will the
next economic myth be, sold to the world ???
--- from list heidegger@xxxxxxxxxxxxxxxxxxxxxxxxxx ---
By: Jim Willie
In ancient Greek and Roman times, mythology
served a strange but valuable service. First,
it channeled pervasive belief in spirituality
and deity in general, beyond the mortal world.
Second, it cooperated with the sense of
individual human helplessness by putting
structure to the higher powers. In today's day
and age, we have become fixated on the spirit
of money and what it buys in the way of
possessions, entertainment, and leisure. Here
too, the individual is dwarfed more than ever.
The powers that be have assembled a structure.
The apparatus consists of a truly bizarre and
frightening intertwined network of derivative
gears, intervention devices, bank lending
methods, mortgage finance centrifuges, stock
equity conversion means, promotion systems,
and advertisement conflict of interest. The
spin for the system is a complex series of
economic myths, not unlike the great Greek
mythology that endured centuries. The American
version is certain not to last as long. When
complex systems begin to fail, as the US
Economy surely has since the 1980 decade, the
system absolutely requires a convincing
mythology to serve as unquestionable dogma.
Ponzi outlined the importance of dogma to
perpetuate a system gone awry. In the United
States, a complex system has emerged with
irrational beliefs which have no bearing on
reality. We have the Oracle of Delphi in the
Federal Reserve, whose spokesman is Chairman
Alan Greenspan. Despite his constant stream of
errors and fallacious analysis, he is looked
to for counsel as a precious seer. Mount
Olympus is the Austrian School, whose
teachings have been ignored since the Bretton
Woods divorce in 1981 with tragic
consequences. That divorce opened Pandora's
Box, without question. Partygoers rarely visit
the mountain, too busy in celebration. Zeus is
Robert Rubin, architect of the Strong Dollar,
whose power and luster has surely diminished.
His wife Hera might be the Japanese central
bank, which lifts him whenever he falls on his
face, and stumbles in sleep walking overnight.
Achilles, the great warrior, is the US
Military ready to do battle to defend Greece,
the US-centric world of commerce. Powerful
Atlas might be JPMorgan, unable to hold the
world of derivatives atop his strong
shoulders. The many nymphs prancing about,
exploiting their sexuality, are the money
lenders, whether bank leaders or car dealers
or electronics merchants with their sexual
front. Chief among them is beautiful
Aphrodite, embodied in Fanny Mae after it rose
from the 1989 Savings & Loan debacle out of
its restructured ocean foam. Helen of Troy
might be the wonderful US mfg base, long gone,
not exactly taken, but not yet desired back.
Poseidon, god of the ocean, clearly is Wall
Street which governs the sea of capital and
debts. Brokerage houses urge money infusions
from the public much like the Sirens, as they
lured sailors to the rocks and wreckage.
Diana, the goddess of the hunt, might appear
with corporate initial public stock offering
launches, arrows flung into the equity
markets. The satyrs chasing nymphs are
household consumers, who find themselves
thoroughly spent after satisfying the loan
terms. Ulysses is Joe SixPack, who struggles
mightily, and less certain to enjoy the
success of the ancient Greek sailor. Medusa,
the serpent lady with snakes as hair, turns
men to stone in much the same way that
bankruptcy does. The grand odyssey involves
negotiation between Scylla and Charybdis. The
multi-headed monster dog Scylla lurks like
inflation, easily dragging its prey into the
cave of value erosion and debt writedowns. The
dreaded giant whirlpool Charybdis has already
begun to show its power, as secular deflation
circulates in its cycles. China commands the
whirlpool's bamboo stirring spoon, as it
limits wages and prices. The Chinese yuan
currency peg serves as a Trojan Horse, taken
in by our economy, only to wreak horrendous
damage, but not yet recognized. The modern
American economic mythology is soon to turn
into a Greek tragedy. The system has become
unsustainable and begs for correction.
THE NATURE AND ROLE OF MYTHS
Today, the Macro
Economy Myth is under siege, a certain quiet
attack. Currently at work is the third in a
long list of myths used as mental glue to hold
together the internal mechanisms of the US
financial system, to maintain foreign
confidence in our markets, and to attract
enormous sums of capital on a daily basis to
keep both Wall Street and the US Economy
going. The petro-dollar foundation, the basis
of world commerce, has been shaken in the last
two years. It is fortified at irregularly
timed interventions by foreign central banks,
without which sudden swoons in currency
exchange rates and sudden rises in interest
rates would deliver massive shocks to real
economies around the globe. The petro-dollar
is complex, fully intertwined with
geopolitics, with banking & monetary system,
with financial markets, and with international
commerce. A quick dismissal of its importance
by economic pundits is absurdly shallow and
recklessly na?Øve. It is most likely linked
with military motives. In the 1970 decade, the
United States began on a course which altered
modern history. Following the Bretton Woods
divorce between the USDollar and gold,
commitment toward social programs, war effort,
and collectivist sponsored home ownership
deepened the departure from true money. Public
and world embrace of myths are of central
importance in order to buttress a foundation
of false money. World commerce is undermined
if only the masses recognized the foundation
of the unbacked USDollar as untenable. Since
when does US Treasury bond issuance provide a
legitimate countervailing force to physical
crude oil? Buying energy supplies with gold
might be impractical. Buying energy with debt
securities, however, goes beyond insanity.
Myths perpetuate because the monetary system
cannot stand on its own merits. The USDollar,
since 1971, has not been backed by gold. By
default, it has in practicality been backed by
USTBond debt. The flipside of the USDollar is
a USTBond, which is a soft sand foundation for
any economic house to be built. The first
great myth was motivated by the need for
stimulus, to remove the US Economy from the
worst recession endured since the Great
Depression. Saddled by enormous ground swell
of costs from higher energy prices, amplified
by growing head winds from the rising costs of
federal social programs, the nation and its
Congress had to be convinced of the first
myth. We have proceeded from one myth to
another, hopelessly unwilling and unable to
accept the tragedy of the divorce of the
USDollar from its golden anchor. All world
financial crises can be traced to the Bretton
Woods divorce. Public economic policy has
become commandeered by adolescent guesswork,
abandoning a century of European experience,
making it up as we go along, experimenting
with the world as its oyster, in a reckless
game where economists cannot prove their
theories. They have done nothing but destroy
the system.
1. 1 SUPPLY SIDE ECONOMIC MYTH
(TRICKLE DOWN) Eight years later,
President George H. W. Bush would get it
right, when he called it "Voodoo
Economics." During its day, it was
embraced with some hesitation, as few
options seemed available on the political
table.
President Reagan, armed by theories from
Laffer, urged on by Pentagon defense
contractors, convinced Congress, tacitly
approved by the public, to sponsor tax cuts of
magnificent size and to recommend
unprecedented military buildup known as the
Strategic Defense Initiative (aka Star Wars).
The reasoning was that massive stimulus in
money supply, both in the private corporate
sector and in the public defense sector, would
engineer economic growth, lift wages, and pull
us out of recession. Eventually, demand would
match supply, stride for stride. Myth #1 is
the Supply Side Economics known as
Reaganomics. While the US Economy did emerge
from the tight grasp of economic stagnation in
the mid-1980's, the myth was unmasked a
fateful day called Black Monday. Stocks,
housing values, and the USDollar had all
continued to rise for well nigh a full year,
even as interest rates had ratcheted upward to
serve warning. The warning was not heeded; the
system built upon debt was sent reeling. A
Pyrrhic Victory had been won. We did emerge
from recession, but with crippling federal
debt, which had risen by $2000 billion under
Reagan. Many regard the price as worth it,
since its investment buried the Soviet Union.
Little did Supply Siders realize that seeds
were being planted to trigger secular
deflation, as debt collapsed and production
came into over-supply. Asia was the grand
beneficiary of an acceleration in trade
surpluses, used fractional banking practices,
built up it manufacturing base in magnificent
style, and prepped the day for the Asian
Meltdown ten years later. Supply Sider
principles had earned the nation an extra $2
trillion in federal debt, huge Asian
production capacity, and a fresh troublesome
lingering recession from 1988 to 1992. A stock
bear market, coupled with a housing decline,
left the economy in tatters. Yet the myth
prevails to this day as a success.
Underpinning the Supply Side myth were several
construct beliefs, all laughable but held
firm. We had the NAIRU, non-accelerating
inflation rate unemployment, which claimed
that a jobless rate under 5% was innately tied
to higher price inflation. The Phillips Curve
put a mathematical face on this absurdity, as
it formalized the mythical relationship
between the two factors. When that failed, the
line was drawn at 4%. We employ better methods
now. We simply measure a participation rate,
which counts the number of people excluded
from the employed. The jobless rate merely
measures those receiving state benefits. By
removing federal extensions for jobless
benefits when those benefits become exhausted,
the jobless rate fell, a certain political
benefit. The Laffer Curve expects higher tax
revenue from higher tax rates in a direct
response with no reaction. It also expects
higher tax revenue from much lower tax rates
in an exercise in powerful elasticity. In
other words, tax collection receipts benefit
regardless, have the cake and eat it too. How
incredibly silly, but widely accepted. Budget
Director David Stockman was a certain
charlatan, as he sold the idea, later changed
his numbers, but Reagan used an erroneous
numbers anyway in an historically hilarious
Keystone Cop event. Evidence of the failure of
the first myth is the abandoned mfg base, a
1987 Black Monday stock bust, a 1989 Savings &
Loan disaster, and the birth of the Plunge
Protection Team. The most damaging symptom to
this myth was the rise in the USDollar in the
middle of the 1980 decade. In reaction, the US
manufacturing base gradually went sent
offshore to Asia, first to Japan, later to the
Pacific Rim where the Asian Tigers reside.
Back then our cast of economists was much more
competent. They realized the removal of the
mfg base meant lost jobs, lost wages, and
national impoverishment. Today we know better
!?!?! The Plaza Accord was agreed upon by the
industrial power finance ministers. It was
intended to reduce the value of the USDollar,
in order to encourage a return of the US mfg
base. While the US$ was steered lower, the
labor cost difference between Asian and the
USA could not be addressed by currency
adjustment alone. Their labor costs are
between 5 and 20 times lower than inside the
USA. The mfg offshore movement continued, only
to accelerate ten years later.
1. 2 NEW ECONOMY MYTH
(TECHNOLOGY MIRACLE VIA PRODUCTIVITY)
Unlike the previous cycle, the Federal Reserve
played
a major role in what came next. The name
Clintonomics never caught on, nor did it have
much meaning, for good reason. No significant
planks of public policy were urged on by
President Clinton. The entire nation was
gripped, nay infected, by the notion that
advances in technology had paved a path to
greater corporate profitability through
enhanced productivity. Financial markets and
new patterns of investment behavior were the
dominant themes. The tech miracle had really
changed lives, lowered prices, but not aided
earned greater profits. Myth #2 is the New
Economy powered by technology and
productivity. Not only was the trend in
corporate earnings in a severe downtrend, but
productivity had been superior in the previous
decade. Stock valuations were unsustainable,
unjustified, and ultimately collapsed. Savings
disappeared, as stock accounts were considered
savings. We bought on credit, powered up our
credit card debt, and considered ourselves all
wealthy from inflated assets. We earned
ourselves the greatest stock bust since the
Great Depression. In the wake of the 2000
stock bust, a recession came soon afterwards.
The Fed, led by Chairman Greenspan, had been
the myth's greatest proponent and cheerleader.
To this day, his reputation and public
confidence in him have not been marred, which
is an even greater miracle. Rubin Strong
Dollar Policy was reckless, totally in
contradiction to prudent Plaza plan, and a
firm betrayal of the American working class.
Of course, he and the Fed represent interests
of the banking aristocracy. Household debt
rose all through the decade. Dependence upon
inflated asset values grew. Imports from Asia
became a constant fixture in our economic
landscape. More to the point though, the heart
of the myth was false. Corporate profits
peaked in 1985 and have trended down for two
decades. Productivity, the real surprise,
actually has been falling since 1990 despite
certain technological developments. We all
know about cell phones, fiberoptics, broadband
connectivity, internet commerce, fast PC's,
cavernous storage devices, and breakthroughs
in medical research. It has not translated
into greater corporate profit nor
productivity. Instead, it has resulted in
lower consumer prices, cemented by Asian
production dominance. The US public saw the
technological marvels, as did the
tech-ignorant Chairman Greenspan. As a
cheerleader for our financial markets, the
good chairman worked overtime to sell US
stocks and bonds. He operated as the champion
over price inflation and the advent of
perennial prosperity. Almost all his claims
were revealed as a sham during the stock bust,
but to this day they are still widely believed
as part of a productivity miracle. Today, that
miracle is closely aligned with job loss
through Asian outsourcing. We now import that
same productivity from Asia and its cheaper
labor. The scourge of three decades of
monetary inflation is seen in the form of
heavy debts, lost jobs, and Asian excess
production. In other words, secular deflation
and its massive forces. Evidence of the
failure of the second myth is the 2000 stock
bust, the telecom debt bust, the sharp rise in
household debt, the Enron, Arthur Anderson,
WorldCom, and other scandals. The bubbles have
been replaced with bigger bubbles, and the
accounting & brokerage scandals have not
ended.
1. 3 MACRO ECONOMY MYTH
(INTL CREDIT FLEXIBILITY & ASSET INFLATION
WEALTH) Greenspan boasts that the Federal
Reserve has successfully dealt with the
symptoms of the 2000 stock bust, rather than
provide a lasting authentic remedy to its
underlying problem. This is pure heresy by a
central bank, since a stock and telecom debt
bubble has been replaced by a Treasury bond
bubble, a mortgage finance bubble, a housing
bubble, and a deep dependence by the US
Economy upon housing values and equity
extraction. This he calls "wealth generation"
which any central banker worth his or her salt
rejects summarily. Chairman Greenspan speaks
like a hedge fund manager, not a central
banker. He has become the banking system chief
political spokesman, as he justifies a record
of reckless inflation and debt explosion.
Absence and abandonment of a manufacturing
base, long dispatched to Asia and other parts
of the world in search of lower costs,
resulted in massive trade gaps. Those gaps
have remarkably escalated (a prediction of
mine in spring 2002) despite a declining
USDollar index. Federal deficits have risen,
partly from the economic stimulus of tax cuts,
partly from a war to resist terrorism and to
secure foreign oil supplies. Foreign capital
needs have reached crisis proportions,
currently running at $2 billion per day.
Credit needs are minimized in feeble arguments
by our Fed Chairman in what he describes as
"flexibility" of the macro economy. Myth #3 is
the Macro Economy powered by asset inflation
and funded by the flexibility enabled by
foreign savings. It attempts to justify a
horribly imbalanced US Economy, dangerously
dependent on foreign capital, which lacks
valid income generation from capital
investment, actual production, and wage
growth, rather than financial investment which
hopes for continued price inflation. Several
miracles are in progress: housing prices rose
30% or more nationally instead of falling
their customary 15% following recessions, as
buyers seize on cheap money in mortgage
finance foreign central banks purchase over
35% of USTBonds in order to continue to
support an overly indebted and crippled US
Economy stock valuations continue to march to
the beat of the Fed Valuation Model which
employs a multiplier inversely related to
interest rates\ the public still believes we
benefit from productivity gains No system can
survive for long as it depends on foreign
credit supply in the present magnitude. Asia
has its own credit needs, growing to be sure,
and surely in conflict with their willingness
to supply the US and its voracious appetite.
No system can survive for long when its
depends upon asset inflation as the primary
wealth generating power source. Natural
corrections surely come, and when they do,
immense problems will come to the US Economy.
The foundations of the current myth are far
more laughable than the previous two myths.
Recently, Greenspan speeches center on social
programs being scaled back. He recognizes that
Social Security, Medicare, Medicaid, and other
entrenched programs cannot be funded. He cites
a growing federal budget deficit, which causes
neither alarm nor desire for reduction. In my
opinion, he is actively engaged in a publicity
campaign to create an alibi for upcoming
failures and systemic shocks. Backroom cleanup
efforts must be intense, as the JPMorgan
hedgebook and Fanny Mae balance sheet require
full-time attention. Such undertakings are
kept quiet though, and far from the
undiscerning public eye. JPMorgan and Fanny
Mae stand as vivid evidence of the failure of
the previous two myths. Evidence of the
failure of the third myth is the constant flow
of jobs in Asian outsourcing, the Fanny Mae
mortgage finance faulty foundation, dependence
upon the housing bubble to continue consumer
spending, growing trade gaps, and growing
federal deficits. Denial is reaching
unprecedented epidemic proportions. To be
sure, many symptoms of failure are being
hidden from the public, like the sanitization
of the JPMorgan hedgebook. How could bond
revolts in summer 2003 and spring 2004 have
escaped the world's largest holder of bond
derivatives?
CONCLUSION
Far too little scrutiny has been focused upon
the foundation of the world monetary system, the
petro-dollar. The name "petro-dollar" is used
to convey the critical transaction whereby
energy is priced and purchased in USDollars.
All prevailing myths, both past shattered
myths and current exposed myths, are essential
to maintain the system, to urge on confidence,
to confuse the public, and to deceive
foreigners. The real problem is that the world
monetary standard, the USDollar, has no
intrinsic value. It is not backed by gold or
any other hard asset. The world's largest
economy, in the United States, has become an
inflationary engine, with significant
abandoned manufacturing base, and vanishing
income producing machinery. Its once powerful
wealth production apparatus has been
systematically dismantled in search of lower
costs. What happened to its awesome mfg base
is now in the process of being duplicated in
the vast service sector. The US Economy has
become tragically dependent upon inflation as
a primary power source. In order to keep the
charade going, the nation, its trading
partners, and investors worldwide must be
fooled, tricked, and deceived by myths.
Without such myths, we would be forced to
endure a painful correction to inflated
assets, and be subjected to a severe debt
downgrade. The consequence would be a grand
decline in the standard of living for most
American households and citizens. The world
economy depends too much on our spending, even
if that spending is led by evermore debt in an
overly burdened debt environment. In all
likelihood, the world economy would enter a
deep recession, or worse. So maintaining and
perpetuating myths is essential. The better
questions remain: When will our inflated
assets (stocks, bonds, housing) correct
downward in price ??? When will Asians grow
tired of exchanging their industrial output
for risky debt securities ??? What will the
next economic myth be, sold to the world ???
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