Dark Skinny

Like many others, I’ve read much on the issue of the current US financial crisis, and what has come out of all this effort is that I am amazed at all the tilted versions of the economic truth as well as to its cause and remedy which arise from both the media as well as from the America’s well-practiced government spinmeisters. There is the conservative view, the liberal side, the libertarian voice and the much feared socialist view. All stupid labels because good, well-practiced economics is - if you think about it - never political in its purpose or execution. All these “labels” only serve to trigger and play on the fears of the ordinary US citizen, to habitually force US citizens into “believing” the government or media spin as honest and true, but whose only real and exacting purpose has been to perpetuate popular self-image and therefore to steer and fool public opinion onside, whose end-purpose serves only to prompt yet another slithering and detestable shadow agenda. Bush Jnr is an overt master of this type of plebescitary and so-called “patriotic” government service or behaviour. But I wont waste time anymore talking about about an economic lame duck in this piece.

In its own perpetuation and disregarding which political “side” you are on, perhaps economic theory is the criminal here. In a quote by Ludwig von Mises of the Austrian School of Economics, here is what he had to say about politics and all those -isms:

“We can quantify the deaths caused by both communism and fascism, but we will never know how many deaths have been the result of capitalism; of nothing more noble than a rich man wanting to be even richer, and sacrificing the health and lives of millions of workers to achieve this. Don’t even try to count how many people capitalism has killed, because not only will you not know where to begin, but also it will never end.”

Notice that this quote is completely apolitical and self-evident - since every political stance - left wing, right wing, democracy and even financial capitalism - is accommodated within its single, critical sweep.  You cannot brand this statement  as  socialist, conservative, liberal etc. because it is so annoyingly all inclusive. Instead, it highlights the pernicious fact that not only politics but economics can easily be governed and ruled by power and greed (in whatever political overcoat) which are not economic or political entities - but human traits. This is the his ultimate message.

I’ve just finished reading “Crashproof - How to Profit from the Coming Economic Collapse” by Peter Schiff, and I was fairly stunned with the accuracy of its predictive content (written in 2006) and particularly the simplicity with which he explains macroeconimics, world markets and the US economy. This book is well worth a read. Here is an extract and a parable which fairly accurately describes how both Consumerism and Debt are most definitely finite and, in the end, a bad economic habit:

A Tale of Two Farmers
Farmer Chang grows only oranges. Farmer Jones grows only apples. Each grows only the fruit he produces most efficiently, trading his surplus for the fruit grown by the other. Both farmers benefit from comparative advantage and free trade. The sole reason that Farmer Chang “exports” oranges is so that he can afford to “import” apples, and vice versa. Suppose that one year a flood wipes out Farmer Jones’ apple crop. Not having any fruit to trade, but hungry nevertheless, he proposes to trade apple IOUs for Farmer Chang’s oranges. Since Farmer Chang cannot eat all the oranges he grows anyway, and since Farmer Jones’ IOUs will pay 10 percent interest (in extra apples, of course), he accepts. Farmer Chang accepts Farmer Jones’ offer only because of the apples that Farmer Jones’ IOUs promise to pay. By themselves, the IOUs have no intrinsic value. Farmer Chang cannot eat them. It is the promise to pay additional apples that gives the IOUs their value. When Farmer Jones issues his apple IOUs in exchange for real oranges, he does not actually pay for the oranges. Payment will not really be made until the following year when Farmer Jones redeems his notes by giving Farmer Chang all the apples his IOUs obligate him to pay. Only then can the notes be retired and the transaction be completed. Now suppose that the following year Farmer Jones’ crop is again destroyed, this time by a hurricane. He and Farmer Chang once again make the same deal, with Farmer Jones getting more of Farmer Chang’s oranges, and Farmer Chang accepting more of Farmer Jones’ IOUs. Further suppose that similar natural disasters continue to besiege Farmer Jones for several more years, until it finally dawns on him that he is eating pretty well, without actually farming. He therefore decides to turn his apple orchard into a golf course and simply play golf all day while enjoying farmer Chang’s oranges. In other words, Farmer Jones now operates as a service economy. Farmer Chang, by contrast, is so busy growing all those oranges that he never gets a chance to play Farmer Jones’ course. In fact, he has been accepting Farmer Jones’ IOUs for so long that he no longer remembers his original reason for doing so. He now counts his wealth based solely on his accumulation of Farmer Jones’ IOUs. Farmer Jones actually enjoys such a good reputation within the farming community that Farmer Chang is able to trade some of Farmer Jones’ IOUs for goods and services provided by other farmers and merchants. However, as a result of Farmer Jones’ good reputation, no one notices that his apple orchard has been turned into a golf course. His IOUs are now worthless since Farmer Jones no longer possesses the ability to redeem them with actual apples. Some might argue that the entire community now depends on Farmer Jones and his worthless IOUs and that Farmer Chang and the others will simply accept them indefinitely to avoid acknowledging the reality of their folly. Of course, were these revelations to occur, any unfortunate holders of Farmer Jones’ IOUs would officially be forced to realize their losses. However, their true financial situations would improve, as any further accumulation of worthless IOUs would end. As for Farmer Chang, he would once again, literally, enjoy all the fruits of his labor. The real loser, of course, would be Farmer Jones, for without a viable apple orchard or the ability to buy oranges on credit, he would starve. It would take years to transform his golf course back into an orchard, regain his lost knowledge of farming, and replace his obsolete and dilapidated farming equipment (provided he hadn’t already traded it in for golf carts and titanium clubs). In the end, Farmer Jones’ only alternative might be to sell his golf course to Farmer Chang and take a job picking fruit in his orange grove.

Currently, there is much worry over the US auto industry. There is, perhaps, a good pattern and a useful parallel here. The UK auto industry died over twenty years ago because of poor management strategy, unions that were too strong and expensive, which led to poor quality standards, lagging research and uncompetitiveness. Sound familiar ? So the British government let the industry change itself and allowed foreign takeovers and company deaths. After all, in an honest  free market - as supported by both the Keynesian and Austrian Schools - only the strong  and successful should be allowed to survive. The same should be allowed to happen to the failing US auto industry. If this industry is propped up - even with the Chinese and Indian  auto markets rising - the US taxpayer will pay through the nose for this mistake. It’s purely a case of do you save a non-competitive and incompetent industry that is trying its best to die - just for the sake of maintaining auto-workers jobs ? And if this industry is supported, what will be the long term effects on an already financially strained and cracked US economy ? Peter Schiff convincingly extends these reasons in his recent article The Truth About Bailouts.

In terms of the American economy or any other national world economy for that matter, I always try to take it down to the Home Economics level. Nice and simple. The US currently has a National Debt of over $10.5 trillion and its National Debt is about five times its reported GDP. So just compare this to  a parable. Say you have a spouse, a family of two kids and a house. Now suppose the parents of the family earn a certain salary we will call X dollars. But both parents have combined outstanding monthly debts worth 5 times their earnings. But they never payoff this debt until, eventually - because of the climbing interest - both parents aren’t even capable of paying the interest anymore and bankruptcy ensues. I also realize that perhaps this parallel is a little unfair. After all, the US government can always sell its debt. As well,  the Fed can just switch on its printing presses to create some more liquidity. Forgive my assumptions here, obviously Home Economics doesn’t include the ability to sell your debt on the never-never and certainly would never include creating your own counterfeit money at home either. In individual terms, this counterfeit practice would correctly be described as immoral and criminal, whereas in terms of the Fed - this same counterfeit  activity would quietly be described as a “good and useful  banking mechanism”.

There are also many whose stance is rigidly to maintain the economic status quo, trying desperately and hopefully to cling on to this current order, such that they are able to continue  their wonderful debt-based lifestyles. But a national economy doesn’t really care about lifestyles or wishes or even politics, this beast will simply ignore all of us and just react to the economy and markets, which will either move back towards equilibrium and stability or - much more likely - towards chaos. Wishing will not make it go away ….

…And many will have to stop hiding and become a little more honest and, perhaps, a little less greedy - forced, in the end, to come out from behind the hypocrisy of That Bush, and back into the harsh glaring reality of realized unsustainable economics.

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