Friday, June 25, 2010

The Perfect Waste of Princeton Economics

I look at the economy differently than most Wall Street Economists. These highly paid salespeople have been consistent with their advice for the past 20 years. There is no economic problem that can’t be solved with more indebtedness. My perspective is different. Although I have a degree in Economics, I am an Accountant.

Presently our nation’s perceived high unemployment rate is the new mantra to sell our country more debt. Economists, such as Dr. Paul Krugman of Princeton, tell us that we are facing another Great Depression unless we borrow tens of trillions of dollars from hostile foreign nations and give it to our wasteful government. I can only shake my head and say, “Please look at the numbers before you panic our nation with unfounded comparisons.”

These are the facts. Our economy is growing and creating plenty of income for everyone. This income growth is being funneled to our government and the financial sector and away from the job creating productive private sector. Our government is using it's disproportionate share of income to subsidize inefficient areas of our economy and to give huge pay and pensions to it's highest paid employees. The highest paid bureaucrats retire at 50 with $100,000 pensions as we give pink slips to teachers and police officers. The government is the second best job killing machine that has ever existed.

The financial sector puts the government job killing machine to shame. Our financial sector has been able to kill the economy with huge investment bubbles. If the government can be called a job creation machine gun then the financial sector must be compared to an economic neutron bomb.

None of these government or financial sector shenanigans create jobs for the productive private sector. They are destroyers of jobs as income is misallocated and then wasted. One could almost call it a perfect system of wastefulness. The antithesis of the business model.

We can call the support of such a system 'Princeton Economics'. More debt, bigger government and an explosive financial sector while the economists are "tilting at windmills".

Let's look at the numbers.

Looking at the Asset side of the equation, our current housing market, our stock market, our bond market and our commodities markets are over valued compared to historical standards. We have a record $4.2 trillion in money in banks that could flow into investment markets when investors decide that the economy is safe once again. So there appears to be plenty of money in the economy. A rational person with an eye toward the long term could even argue that there might be too much liquidity in the system. Excess liquidity in 2003 caused the Housing Bubble.

Currently we have overpriced investment markets and plenty of liquidity to back them up. Now, compare that to the Great Depression. Stocks, Real Estate, Bonds and Commodities were driven to deep undervaluation. Banks closed their doors so depositors could not access their money. There wasn’t just a lack of money, there was no money. So we have too much money in the system today compared to none at the outset of the Great Depression.

Now the income side of the equation appears even better. Over the last 6 years our nation’s disposable household income has increased 34% and our nation’s GDP has increased by about the same amount. This is extremely good income growth considering we are overcoming a massive government induced bubble from too much liquidity in 2003. By all rights our nation’s GDP should be going down as a hangover from the Housing Bubble.

During the Great Depression the GDP was cut in half. This slash in income was a truly unprecedented event. A massive hit to income plus the historic lack of liquidity meant we got the one-two punch that knocked our nation to its knees in 1929 and did not recover until WWII.

Just in case the Princeton Economists are confused by the numbers let me recap. Today we have plenty of capital and very good income growth. During the Great Depression our nation was down for the count with income cut in half and the money spigot turned off. We are living through the antithesis of the Great Depression.

So instead of ludicrous comparisons to the Great Depression wouldn’t it be more useful to determine why the unemployed 10% of our population are not benefiting from the 34% national income growth over the last 6 years? Would it not be more fitting for a Nobel Prizing winning economist to question why we give our income growth to the government to mow down private sector job growth and why we enable our financial sector to play with economic bombs?

During the darkest days of the Great Depression 25% of our nation desperately wanted a job and had absolutely no income. There was no government support system so in many cases the unemployed went from town to town, willing to work at any job just for a hot meal. Our national income was cut in half so there just wasn’t enough money for everyone. Many investors lost everything. People starved.

Today 10% of our workers are paid by the government to stay at home. The other 90% share our growing national income with an unequal split between the government’s favorites and our productive private sector. We have created a huge government-run financial casino where rich investors are urged to make ridiculous leveraged bets and then are bailed out when these crazy bets lose money. As the rich spend an amount equivalent to the GDP of all the starving nations of the world on the diet industry, our poorest neighborhoods tend to lean toward obesity.

The only common variable between our current period of excess and waste and the deprivation of the Great Depression is the Government. During both periods our nation lived through historically bad government policy.

Krugman says we are reliving 1937. The numbers suggest that we are reliving 2003. We are bailing out rich investors. Absolutely no private jobs were created with Greenspan’s 2003 bailouts. Absolutely no private jobs will be created with the debt we are incurring now. The rich investors will be bailed our again and the poor will get poorer and more dependent on the government.

This is the antithesis of the Great Depression.

I am shocked by the waste and lack of accountability in our current government. But what is more shocking to me is how a Nobel Prize winning economists can demand that the remedy to our nation’s 15-year orgy of debt due to a total lack of government accountability is to give the government more money.

I am an accountant and I have described the math of the situation. If Dr. Krugman is adamant that he wants us to borrow money in our children’s name from hostile foreign nations to be paid back at high interest rates, so be it. Just please do me this courtesy. Please don’t compare the speculation and income misallocation of today with the desperation and hardship that our grandparents faced during the Great Depression.

They were our nation’s greatest generation and alas, we are the most selfish.

There is no comparison.

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