Saturday, April 3, 2010

The Cookie Jar

I think of our founding fathers like grandparents. They thought long and hard about the children of the future and created a framework of sound government and sound currency. Rules and laws to pass on to future generations. This is our country's legacy. I think of it like a cookie jar. A simple savings repository placed high on the early log cabin kitchen shelf that holds the family nest egg, important deeds and documents destined to be passed from generation to generation.

A cookie jar is a little different than a piggy bank. A piggy bank is savings passed directly to a child. A cookie jar represents a longer time line such as wealth and ideals passed from a grandparent to a grandchild. It's more of a legacy than a simple savings account.

A piggy bank can be seen as something with just an immediate dollar value. Money that will be spent when a child reaches adulthood. A cookie jar becomes more valuable with each generation until it ends up holding the morals, principles, ethics and values of a family, or in this case a country. It will also hold all of the country's accumulated wealth.

Anyway since the time of our founding fathers each generation has added something to this national cookie jar. Some generations have added wealth and some have added a framework of ideals and principles that would make our country stronger.

  • Andrew Jackson added a sound currency.
  • Abraham Lincoln added the concept of a united nation.
  • Teddy Roosevelt added laws to protect us from big corporations. He also set aside land for our national parks.
  • Franklin Delano Roosevelt added more laws to protect us from the financial elite and the big banking interests.
  • Lyndon Johnson added laws to protect the under represented.

By the 1970's our country's cookie jar was full of a nest egg with enough value to last for 200 years. We had a vast store of wealth and ideals. People owed their homes. People saved money. Many had pensions and fairly priced medical plans. Most household's only needed one member of the family to go to work while the other member could stay at home and raise the children. We had a solid middle class. Our currency was more sound than any in history. Our government was strong and protected us from the tyrannical wealth and power that can be created in an unchecked capitalistic society.

This in my opinion is the biggest problem with capitalism and I think our founding fathers knew this. Unchecked wealth and power are the biggest threat to any capitalistic nation.

So in the 1970's we had an almost perfect middle class society. But that wasn't good enough.

Wall Street suggested to our government that we could have a higher standard of living if we borrow a little from the cookie jar. They said that it would get paid back with interest and everyone would be better off.

I would call this robbing from our children's legacy but at the time they called it "trickle down economics". The Wall Street economists were certain that giving money to the rich will let some trickle down to the poor.

But in essence it took away most of the checks and balances to protect our people from tyrannical wealth and power. We lost many of our principles that had been placed in the cookie jar over the past 200 years.

I would like to compare this pivotal moment in history with actor Mickey Rooney's parents robbing all of his wealth from being a child actor. The first dollar that is stolen from a child's piggy bank is the hardest. I can picture it in my mind. A parent with a coat hanger fishing for pennies and nickles that will be stolen from his child. The mechanics of the theft is easy. The difficult part is rationalizing the behavior. The first dollar is the hardest to procure because of this guilt and progressively it becomes easier and easier until it becomes a parent's right to take the money.

The 1970's was our watershed moment. "Trickle down" was the first dollar that was stolen. Our country was able to rationalize the behavior. But this money was not just taken by a father from a child's piggy bank. This was the theft of a legacy handed down from all of our previous generations.

The theft of our children's piggy bank would have been a outrage. But the ruination of our children's cookie jar with the loss of all of the financial principles and values and wealth created with great sacrifice by the past 30 generations is an abomination.

We built this nation as savers but now we are debt fueled consumers. Our grandparents were individualists and mistrusted a government that is to large. Today our government is seen as our savior as it borrows more and more money and grows bigger and bigger controlling more and more of everything. There is far more debt than could ever be paid off but the Wall Street economists insist that we can debase our currency and magically make the debt go away.

So sound currency is gone, sound government is gone, all of the wealth has been spent and we are now placing our children into debt servitude to China, The Middle East and Japan.

Progressively we have robbed the cookie jar of all of wealth that was lovingly left for posterity. The wealth is gone and we are now doing what Mickey Rooney's parents were not even capable of accomplishing. We are borrowing money in our children's name and leaving IOU's in the cookie jar.

This behavior is easily seen on a graph. In the 1970's our country's debt to GDP ratio exploded like a bomb. For the last 30 years it has been on a space shuttle trajectory toward the moon. We have rationalized the theft and see it as our right to borrow every last dollar possible to maintain the false prosperity created by the original theft of our children's legacy. We are throwing around trillions of dollars like it's pocket change. The amounts don't matter anymore. It has no value to us because we never had to work for it, and we will never have to pay any of it back. It has become debt owed by our children.

So now thirty years later the cookie jar money is gone and our federal, state and local governments have at least $15 trillion in IOU's to the cookie jar and perhaps $100 trillion in obligations that they haven't even bothered to put IOU's into the cookie jar.

To put it in perspective. We have not paid off any of our country's debt for the last 30 years. None. A Wall Street economist might argue that a few billion dollars was paid back during the Clinton administration but they are wrong as always. We may have paid off a tiny portion of the stated debt but the unfunded liabilities that the government is not putting IOU's in the cookie jar far outweighs a paltry few billion. We have created $115 trillion in liabilities by federal, state and local governments and never paid a dime on the principle as it keeps getting bigger and bigger and bigger.

Here is the bottom line. We have been through absolutely the most prosperous time in human history. And during this unprecedented economic boom we could not pay off a dollar of the national debt.

The next ten years will be one of the most stagnant economic periods since the Great Depression. We couldn't pay off a dime of our debt during the biggest boom in human history but now we are expecting our children to to pay off $115 trillion dollars in a stagnating contracting economy.

And don't forget payments on this debt will at least triple due to spiking interest rates when this debt bomb goes off.

I can understand how our generation was able to rationalize the theft of the first dollar and how it has continued to the point where we feel we must take everything. Bernie Madoff started off as a honest guy but he took a dollar, then two, then, well you know how it ended. It's human nature. If you are in a position of trust, once you rationalize taking a penny you are pretty much bound to take it all. It has happened thousands and thousands of times in human history with people a lot more honest than our elected officials.

But what I don't understand is how our society has created a whole science to explain how the theft is a good thing. Almost every economist today is 100% certain that our country must borrow ever more money to stimulate ourselves out of this insolvency we have created. There is no math that can justify it and no logic that can explain it but everyone is positive that we must use the Japanese model to solve our problems.

I guarantee once Japan hits the debt wall and its economy collapses our economists will still be sure that debt will drive a country out of insolvency. Our economists don't use real math or logic. They would never think of back testing or comparing data. Their formula's are basically just a form of rationalization to create a planned outcome. And that outcome is the theft of our country's cookie jar.

Remember these are the same economic knuckleheads that didn't see the Tech Bubble, didn't see the Housing Bubble, didn't see the Credit Crisis and don't see a recession coming in 2011-2012. Their science is to simple minded to understand an accounting balance sheet and they can't comprehend the biggest economic event of the 20th century. This would be the collapsing of the interest rate mega bubble.

I would also like to add that these "economists" are the same people that are just now demonizing Alan Greenspan for pegging the Fed Funds rate 325% below the ten year treasury for a year and a half. This is happening while they are cavalierly forcing the Fed Funds rate over 2500% below the 10 year treasury rate for an "extended period" or basically "forever". Eight times as low for maybe ten times as long.

So it could create 80 times more distortion in our economy than Greenspan's faux pas.

Unfortunately, classical economic theory doesn't have a balance sheet. So debt doesn't really exist in Wall Street economic theory. All of the Nobel Prizes that were given to this group can't change the fact that debt has to be paid back by someone, someday.

Presently our government is insolvent. Our banks are insolvent. Homeowners that have a mortgage are insolvent. Over half of our households are living paycheck to paycheck as they pay far to much for education, health care and financial products because of inefficient and manipulated markets. For the past 15 years asset prices have spent most of their time in a bubble as the government is debasing our currency, manipulating interest rates, while borrowing vast amounts of money from the cookie jar and funneling a significant portion of it to Wall Street. Most of the time our government doesn't even put IOU's in the jar anymore.

Much of these unfunded promises will turn into high interest rate debt for our children to pay in the future.

Instead of one parent working, two must work. Families are so strapped for cash that they are not able to save. So most will not be able to retire.

In a generation we have spent the wealth created by our ancestors. We then decided to borrow more money than we can possibly pay back. We are so broke that the only people that will lend us money now are hostile foreign nations. We don't save and need twice the amount of people working to support a household while our children live at daycare. While our children live at daycare we can't afford to properly educate them. The education system in our country has become second rate.

But the biggest problem is that we are losing the "middle class" as our rich elite are taking more and more of our nation's resources.

So what are we doing.

Our markets are climbing to overvaluation once again as everyone in our nation is looking to the government, Wall Street and the big banks to come to our rescue.

All of the Wall Street economists are adamant that "Trickle down" will be our savior if we can just jam a few more IOU's into our children's cookie jar.

For me, I will never be able to understand political economics. Like I have said before, "I am absolutely 100% politically incompetent."

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