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The U.S. Mid-Term Elections are Over… Yet it Ain’t Over

Politics / US Economy Nov 03, 2010 - 01:41 PM GMT

By: Joseph_Toronto


Best Financial Markets Analysis ArticleOur financial system and our economy nearly collapsed over two years ago. With proper management we should have recovered, but we haven’t. Unemployment, the one thing that voters see and feel, front and center, remains the highest it’s been for decades and voters are justifiably angry.

The diagnosis and remedy has been obscured by dogma and propaganda, but it is not rocket science. Our politicians have had ample time to execute the single most important agenda item of the voters, economic recovery, yet they didn’t. They therefore must be recalled. They fought over health care (medium priority), politics (who gets to be in charge), and dithered over everything else. The most egregious sin of all was giving away Trillions of voter money to overleveraged failing banks and corporations of the elite who made no worse decisions in going into debt than the voters themselves who overextended into debt to buy homes. While saving our incompetent institutions, the people were afforded no likewise relief from their politicians that control their own tax money.

The Diagnosis

The economy suffers from a collapsing money supply and lack of money in circulation because banks don’t want to lend anymore (so much for all of those Trillions of new Federal Reserve dollars now sitting as useless banking reserves). Borrowers also, having been burned, don’t want to be in debt anymore. Our debt based money supply is collapsing. There’s hardly any aggregate demand because consumers aren’t spending while they attempt to rebuild their own balance sheets to get out of debt, all under the burden of high unemployment. It’s the “liquidity trap” and “paradox of thrift” rolled into one stagnant economy. Worst of all, our politicians can’t or won’t see it because they are captives of corporate and banking lobbyist propaganda as they prepare to dole out more taxpayer money to save their precious banks and corporations all while the people continue to lose their jobs and homes.

The Remedy

We need massive tax cuts in relief for consumers and small business employers to help them accelerate their debt reduction, for new hires, and to provide some extra spending cash to stimulate demand. There has been some discussion of complete suspension of the payroll tax for a year or two. This is exactly an excellent remedy and should be enacted and accelerated as soon as possible. The banks and corporations need not worry. The new jobs, spending and demand will increase the money supply by means of increased velocity. It will undoubtedly find its way into the banks and corporations in the form of new deposits and new sales. This is as it should be. Those at the top of the food chain, the banks and corporations, ultimately always have received, and should receive, their livelihood from the millions of individual spending decisions of consumers and not from the handouts of taxpayer money by a handful of ill-informed politicians.

The Curse and the Hope

The taxpayers and voters will remain angry at our politicians if they choose to remain hostage to the corporate and banking interests and continue to dole our massive amounts of stimulus spending to salvage their zombie balance sheets all while ignoring the taxpayers and consumers. Consumers ultimately make up three quarters of all economic activity and are veritably the engine of all economic growth. The hope is that the Tea Party newcomers to Washington will shun the umbilical cord of elite money and propaganda long enough to provide relief to those who put them there, the consumers and taxpayers.

The Risks

There are those who will complain about the massive debt and hyperinflation that the remedy entails. Any sovereign currency issuing government (such as the US) has no need to fear deficits, debt or default as does a government such as Greece and Spain who have forsaken their own currency and have abdicated their power of money creation to other creditors. The government is certainly *not* like the proverbial mom and pop paying their bills around the kitchen table. That image derives from a fixed quantity of money theory derived from obsolete gold standard doctrine and it perfectly demonstrates the “paradox of thrift” (if everyone stops spending and saves at the same time, the economy goes over a cliff) which can drive our economy right back into the dark ages. Modern money is a medium of exchange, a unit of account and its quantity is always highly fluid based on levels of debt, trade, business confidence and velocity. Additionally, any fear of hyperinflation at present is ludicrous given our currently collapsing money supply with the lowest short and long-term interest rates in a century. If the bond vigilantes have no fear, neither should we. Our only risk is future economic mis-management by our politicians should they fail to monitor money supply growth in a recovery and subsequently raise taxes and retire excess money supply as needed to then avoid inflation. It’s that simple folks. It’s called money supply management and at present it requires courageous use of the fiscal power levers we have bestowed upon our politicians for our own benefit instead of the elite.

Very Best Regards,

Joseph Toronto

Affiliated Investment Advisors, Inc.

Joseph Toronto has been a portfolio manager for 26 years for some of the largest institutions in the western U.S. In 1993, Joe founded Affiliated Investment Advisors, Inc., as a registered investment advisor for serious investors seeking professional management for superior safety and returns. Mr. Toronto is a Chartered Financial Analyst and is a member of the Salt Lake City Chapter of the Financial Analysts Society and the Association for Investment Management and Research. He has a Master's degree in investment securities and a B.A. degree with a dual major in finance and management.

© 2010 Copyright Joseph Toronto - All Rights Reserved

Affiliated Investment Advisors, Inc. is a "traditional" portfolio manager for retirement plans, profit sharing plans, individuals, IRA's and other trusts. Affiliated’s portfolio management services are NOT alternative "hedge" fund style and are “fee only” taking no commissions or performance incentives. Affiliated is not a stock broker or financial planner and does not sell any investment or insurance fund or product.

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