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The No 1 Gold Stock for 2019

Our Future Economy, Jobs, Banking, And Governance – Part2

Economics / US Economy Dec 08, 2016 - 04:37 PM GMT

By: Raymond_Matison

Economics

One Possible Outcome - Future demographic impact on the global economy

Developing or emerging nations are still growing in population, are at a much younger average age, and are eager to own more goods.  They do not yet have the long life span seen in advanced nations, and hence a larger proportion of their population remains as consuming spenders. Their spending patterns will promote the kind of consumer economic model that had existed in the more developed world of Europe and North America in the last century.  Accordingly, consumer spending of emerging nations can be projected to rise for decades. 


This development and growth of production and consumer spending will occur for all undeveloped nations, but it will be particularly prevalent along the Chinese created One Belt One Road of nations which connects countries that have never before had efficient transportation infrastructure to facilitate trade.  It is notable that this trade and growth will largely occur without the use of dollars, further reducing the global demand for its current reserve currency.  Therefore, it is an unavoidable fact that dollar usage as a leading world currency will decline, bringing with it economic contraction and pain to America’s populace.

In 2006, China and Russia formed a trading block that also included Brazil, India, and South Africa, often referred to as the BRICS nations.  Since then it has developed institutions comparable to the western controlled World Bank and the International Monetary Fund, and opened the Shanghai Gold Exchange priced in renmimbi.   The Asian Infrastructure and Investment Bank (AIIB) and the New Development Bank (NBD) are getting an increasing number of members from countries that had previously used the World Bank or the IMF, but have been burned by their policies of loan renegotiation.  Since that time China has developed an international money transfer system (CIPS) that is not controlled by the west, thereby overcoming SWIFT sanctions and restrictions on international trade or money transfers.    Accordingly, this increased number of countries willing to use these non-western based institutions has grown such the acronym for these newly allied countries should be updated to that of CRISIS (China, Russia, India, South America, Iran, and South Africa (See: BRICS? No, CRISIS - http://www.marketoracle.co.uk/Article53009.html)   These alliances will stimulate growth in the developing world for decades to come, without any support or participation of America.

Our economic constraints

The current status of our economy is such that it is impaired by an overhang of debt that can never be repaid – unless the real value of this debt is drastically diminished by a massive additional devaluation of our currency.  This debt limits our ability to spend, and therefore slows the growth of our consumer driven economy.  Initially, when borrowing levels are low, available credit and debt at favorable rates of interest stimulates borrowing, promotes overinvestment in productive capacity, and promotes speculation in markets.  Eventually, increased growth of credit and debt diminishes the maximum economic growth rate as more income goes to servicing debt.  Eventually indebtedness reaches a level where further stimulus cannot create additional growth, nor can growth be a solution to our economic quagmire. This rule applies equally to individuals and government, except that governments can continue borrowing long after additional debt to individuals has been foreclosed.  But leading global politicians and economic spokesmen persistently still continue to call for growth as the solution to overwhelming debt, lack of jobs, and other economic ills.

Desired economic growth is also held back by mountains of restrictive government regulations, some of which have been designed and promoted by the elite desiring to protect their businesses from competition.  This is one example of corporate capitalism promoting constraints on competition that are observable in fascist states. 

So is growth necessary or desirable?  Growth is clearly desirable when a moral government with interests to improve the quality of life for its people is its primary objective.  We have seen how China’s growth over the last several decades has improved their citizen employment and incomes while building extensive modern infrastructure.  In the U.S. real wages (inflation adjusted)  have not improved for workers since the early 1970s, despite great growth in national GDP and large improvements in productivity and corporate profits.  Meanwhile infrastructure has been deteriorating.  In this case we can see that growth produces little benefit to hard working citizens.

Since the 1970s the nation’s GDP has increased by over $12 trillion, which denotes substantial growth.  Yet none of this growth appears to have benefited the 99.9% of our population, instead it appears to have migrated only to that 0.1% sliver of elites.  So intent in the use of money gained from economic growth by industry, and secondarily by government is the crux of the problem.  As respectable economic growth has not increased worker wages, and consumers are drowning in credit, with the value of our currency in rapid decline – one can conclude that growth has not been a solution for the 99.9%, and will unlikely be so in the future.  Another conclusion is that neither America’s government nor corporations have any interest in the welfare of its citizens.

Improvements in productivity

The ever lauded increase in productivity, which is always perceived as an important component to driving economic growth, actually is also responsible for limiting employment and increasing unemployment.  Increased productivity means that more goods can be produced without adding employees; therefore, fewer people need to be employed to produce more goods.  Accordingly, these increasingly unneeded employees do not earn an income, and cannot contribute to our consumer driven economy. 

Productivity increases are desirable per se, but in the long run economic benefits accrue much more to the owners of production facilities and corporate leaders than the working population - increasing income inequality between the .01% and the rest.  Continuing improvements in productivity simply means that the number of people in the workforce will continue to decline over coming years.  Reduction in the number of employed translates into a slow but ever rising unemployment rate.  Increased unemployment means, reduced income for these citizens; and reduced income for an economy driven primarily by consumer spending simply cannot grow.  Therefore, growth is not a viable option for solving the overhang of debt or restarting a credible economic revival.  Unfortunately, this trend also translates into a drastic continuing reduction of America’s middle class, the civilian protector of our constitutional republic, exposing it to tyrannical future changes in governance.

Action of the FED

The FED has reduced interest rates as a means for consumers and government to service its debt load.  Indeed, the implementation of negative interest rates not only reduces debt service costs, but by the nature of FED’s money creation, it is now reducing the amount of a fiat money glut in the system despite its previously massive increases by the FED’s QE programs.  These low/negative interest rates necessarily also promote pension asset underfunding which, if kept in effect for a long enough period, will bankrupt every pension plan in existence, impoverishing EVERYONE - eventually causing a national, perhaps armed uprising.  Alternatively, allowing interest rates to seek an appropriate risk adjusted level would explode the budget deficit and increasing debt interest servicing costs to such levels that government debt would have to rise to levels that would completely destroy investor credence in the FED, our government, and DESTROY ITS CURRENCY.

Debt could be inflated away, reducing its real value, but it would also destroy the purchasing value of every dollar, and this would again IMPOVERISH EVERY CITIZEN.  Simply printing the money to pay off bondholders in order to avoid default is the equivalent of inflating it away.  We must not forget that an original dollar issued in 1913, when the FED was founded, now has a purchasing value of approximately $0.03 cents.  So we can see that the value of our currency has consistently been destroyed over long periods of time.  For a “free” people and its government to allow a system of money creation that destroys all but three cents of one dollar in a period of one healthy person’s lifespan is heinous.
 
Due to consumer awareness of unsustainable levels of personal debt consumers have shown commitment to pay down credit, rather than continuing to spend.  As a result, the FED in recent years has not been able to deliver on its official stated goal to create a 2% or more cost inflation.  This debt may eventually need to be forgiven as it cannot be repaid – and it is largely credit based on a fiat money system, loans made from money created out of thin air.  Personal awareness and exposure to this debt has caused the public to be more wary of additional borrowing which has created huge deflationary pressures.  These deflationary or deleveraging forces now affecting our economy, created by our onerous debt are as destructive to the FED system and government, as the inflationary or leveraging forces are to the people.

Improving quality of life

The widely almost globally called for “growth solution” is neither necessary for people to enjoy increased financial security nor to experience an improved quality of life. Only the indebted government and the FED, whose system of money creation depend on growth, inflation, and ever-increasing debt – absolutely require growth for its survival and functioning.  The only quasi-governmental entity that needs growth is the FED, because of the way money is created.  Government believes that it needs growth, because it is a way for those elites in that system to gain additional power, influence, or benefits. 
Growth benefits the owners of production facilities, and productivity further increases their level of profits.  In a company run strictly with goals for maximizing profits, growth will provide relatively little benefit to wage earners.  In a country with decelerating population growth, a fiscally disciplined government, a government with little debt, together with a stable currency does not require growth in its economy for its citizens to prosper.

To improve the quality of life for citizens, government expenditures should be limited to a firmly defined low level of tax rates which can never be raised – rather than taxes geared to the level of ever-growing government expenditures as is the case today.  In addition, one solution to our mountainous debt is to reduce dramatically the number unproductive government workers, constrain all spending within the amount of taxes collected, and strictly limit the amount of government debt.  If there appear desirable expenditures (as there always are), they must be postponed to a time when the present tax collections will pay for them.  Increasing taxes is not a viable option.  Increasing national debt to pay for them is not a viable option.  Accounting gimmicks or unfunded liabilities is not a viable option.  These options are destructive to the economy and people’s wellbeing.  Budgetary discipline and a strong currency that does not lose purchasing power is all that is needed to improve citizen quality of life.

One recent economic consideration among advanced nations has been to provide everyone in a nation a fixed minimum income – without any requirement for work. Such a plan was voted on by the people of Switzerland in 2016, and wisely rejected.  It is a plan that will likely surface also in the United States.  Such a plan must be vigorously resisted.  For those people who think that our present welfare system makes people too dependent on government, a national income plan will destroy completely any moral fiber left in the nation.

Improved quality of life and decentralization.

We can learn from America’s history that most of the improvements in the quality of life for its citizens came from a stable currency and from technological and scientific advances rather than the abstract concept of growth.  Remember that purchasing power diminished by even what economists consider a low level of inflation at 2% reduces purchasing power by 50% over a short 36 year period.  So a 2% rate of inflation is high when applied over a long period of time – just as was the case with a 2.06% rate of population growth.

In previous days it was the sewing machine, the ice box, gas lighting, coal furnaces, radios, and other innovations that improved our quality of life.  More recently it is self-driving cars, air travel, the internet, smart phones, life saving medical procedures, and countless other modern gadgets that are improving our quality of life. To underscore that it is not so much an increase in our earnings due to “growth” as it is due to technological developments, consider the fact that a king living one hundred fifty years ago with all the money resources imaginable could not utilize any of these items until they were first developed, and then soon they became available and affordable to almost everyone.

The natural tendency of growth-seeking companies is to acquire competitors as a means of rapid expansion.  When practiced among all industries over time it creates a great concentration of power – or centralization.  Such centralization improves company productivity, but over the long run reduces the number of employees needed, increasing unemployment.  Elites desire increased centralization and even globalization because it is profitable for them.  In our future economy we actually need dramatic decentralization which will increase the number of people needed to be employed.

A wonderful example can be taken from that of the craft beer brewing industry.  With the advent of 18th Amendment outlawing the manufacture and sale of alcohol in 1919, the government put out of business thousands of companies and millions of jobs across the nation.  With its repeal in 1933 the few still existing companies had the whole market all to themselves and without competition soon became monopolistic national brewers or distillers with major market share.

Over decades, laws slowly became more accommodating to small brewers.  For example in Michigan there were only three independent brewers in 1992.  Today, the craft beer industry is blooming, and Michigan now has over 260 craft brewers in the state – providing thousands of previously nonexistent jobs.  This decentralization provides more quality product choice to consumers, and stimulates the local economy providing jobs and income to job seekers.  Michigan’s experience has been duplicated in states all across America.

Such decentralization needs to happen across all industries, where high technology laboratories, 3D printers, programmable manufacturing machines can reindustrialize the nation with many small businesses producing a multitude of jobs.  Small production can be of high quality and profitable because of smart or programmable manufacturing machines, internet communications and search engines – technologies that did not exist thirty years ago. Small will become beautiful and efficient, re-providing many of the jobs that were previously exported to the low cost foreign labor producers.  In addition, such decentralization might largely foreclose manipulation or control from government and behemoth companies or conglomerates.

Where productivity needs to be improved

Every industry in the country has experienced improved productivity, reducing the number of people needed to produce its goods and services.  For example, in 1900 America had a population of 76.2 million of which 41% were working in agriculture, but by the year 2000 only 1.9% of America’s population of 281.4 million people were involved with crop production.   Similarly, in 1960 manufacturing employment had peaked at 19 million workers, but by 2012 the number of workers in manufacturing had dropped to 12 million.  Both examples are the result of dramatic improvements in productivity.

The only exception to this improved productivity experience appears to be our leviathan government which is now the largest employing “industry” in the nation.  The number of persons working in government in 1940 was 4.3 million, but grew by the year 2010 to 22.5 million persons.  Where are the productivity improvements?  Government must be cut back, even as it massively will increase unemployment.  No politician has been willing to discuss this simple and obvious necessity.  Politicians promise to reduce taxes – an easily salable idea to the public.  But what they fear to say is that government employment and whole departments need to be closed.  To say that government must be cut back is actually an understatement – it should be decimated and brought back to a size it was a century ago.  When this is done, reduced government expense and regulatory relaxation will automatically reduce taxes and stimulate economic growth.

A question of taxation

When our income tax system started a century ago, a relatively small percentage of the population was required to pay any taxes.  In his book “Comeback America” author David M. Walker, former head of the Government Accountability Office states:  “That 1913 law levied a 1% tax on net personal incomes above $3,000.  There was an exception: If you made more than $500,000 you paid a 6% surtax. By the way, $3,000 and $500,000 in 1913 are equal to about $65,000 and $11,000,000, respectively, in 2009.”  Today hardy anyone would complain about paying a total 7% tax on their income.

Yes, the rich paid the majority of taxes at that time, and due to the small size and cost of government it was not a burden for the rich.  Presently, only about half of the people pay income taxes.  The rich could pay all the taxes, and this can be done today without it also being a burden to these taxpayers.  To do this, we must reduce dramatically the size of government at the federal, state, and local levels!  Reduce the number of government workers, and drastically reduce their budget.  Government must be forced to cut back, for it will not do so on its own.  In addition, the welfare system must be cut back, and people made to become more self sufficient.  Productivity increases must be brought to government!

We must return to prior conditions where the security of a government job was balanced by earning a lower income.  The present system where government employees are earning substantially more than productive people in industry, and in addition have greater job security needs to be reversed.  Such featherbedding is not only economically unfair in a market economy, it is corrupt.  In addition, it creates a moral hazard in politics and is destructive to all other working people, raising their level of taxes.

Whether such changes are implemented with administrative foresight or not, these government cutbacks will eventually take place anyway as the economy and financial system implode, unable to resolve the problem of too much debt and too little employment producing insufficient income for citizens with which to pay for mainly unnecessary government services and welfare.  It would be beautifully ironic, if using Rahm Emanuel’s comment about not letting a crisis go to waste, we use this coming crisis to correct our economic and political morass.

Conclusions

The nation is too indebted to ever repay its debt, and servicing of this debt reduces government fiscal and financial options.  High consumer debt slows the potential spending by consumers which would help grow the economy.  Both government and consumers need to deleverage – implying that more their income will be spent reducing or servicing debt.  This situation suggests that future economic growth, given our humongous debt, will be limited.  However, growth and more jobs is not the solution to our economic future.  In addition, due to ever increasing automation we must disassociate growth of the economy from growth of jobs, for they are no longer tightly correlated.

The shrill call for jobs and growth by political leaders cannot be realized – the world is developing in another direction.  While it is possible for new administration fiscal policies to increase employment for a few years as infrastructure projects are undertaken and completed, but over the longer term government policies cannot dial back scientific progress and productivity improvements, automation, artificial intelligence and robotics.  Continued improvements in productivity will require that people work only a few days per week.  Their incomes should be commensurately reduced. People will need to become more educated, better trained, and more self-reliant. This means that there is no room for loss in the value of currency used, which calls for a new method of money creation and its characteristics.

Our national debt and attendant unfunded liabilities can never be paid off, regardless of the rate of growth of our future economy.  There is too much debt for growth to be a solution.  A restructuring or forgiveness of debt needs to be undertaken, which can clean the slate for a new economic start which is not based on debt-created currency.  Therefore, the central bank’s role must be dramatically changed, or it must simply be closed to have money issued by the Treasury, without creation of debt.  These huge changes would create a point of economic and financial discontinuity, disruption, and a reset – a several year painful period of readjustment.

The demographics of the nation are changing such that population growth continues to decline, as the nation’s citizens average age is increasing.  This dynamic also implies that our consumer driven economy will be getting increasingly less stimulus from its primary driver, the consumer.  Continued improvements in automation technology and robotics will reduce the need for workers in agriculture and manufacturing, and perhaps even in services.  Accordingly, the number of persons in our workforce will continue to decline, as the real unemployment rate will soar.  But the irony is that that our quality of life can continue to improve, even if our economy does not grow.

The new economic model must reflect the present reality of stabilizing or declining population with continued aging of our population and its lesser contribution on consumer spending. The new model must be based on reindustrialization and decentralization of power across all industries and government so as to avoid nefarious manipulation of large segments of production and finance. 

The size of government employment should be reduced by at least 50-70% over time, as has been the case in agriculture and manufacturing industries due to technologically driven productivity improvements.  The reduced number of days worked, reflecting also lower income would be offset by the extra time people have to service their own household needs.  This could actually teach people to become more self-reliant, which would also nudge them to become better informed and technologically savvy.

A new national policy could strive to employ most of the nation, by redefining and reducing the number of days every person needs to work.  This would require a change in definition of what constitutes full time employment, and rules for pension and health plan contributions and benefits.  It would require training and educating people to become qualified it working a few days per week in our ever more technological economy.  In this way 95% or more of the people could be employed several days a week, rather than 30-50% of the people working 5 days a week.  With these changes, people will do just fine without high economic growth or more jobs.

Our economic future, financial security and level of quality of life can and will improve.  However, we must get through the painful process of transitioning from our old economic model to the future one.  This requires massive reduction in debt by whatever means, budgetary discipline, the creation of a new value-retaining currency, drastic reduction in government employees, cut back in welfare programs, commercial and governmental decentralization, more inclusive employment with fewer days in the work week, a more educated and technologically savvy populace, resulting in self-reliance and a new true emancipation for every citizen. It seems as a wide river to cross, but George Washington crossed one in winter, at night, and freed an oppressed people creating a new dynamic nation. It looks like it could happen again.

Raymond Matison

Mr. Matison is a U.S. patriot who immigrated to this country in 1949. With a B.S. in engineering physics, an M.S. in Actuarial Science, work in the actuarial field, and as a financial analyst at Legg, Mason Inc., Lehman Brothers, and investment banking at Kidder Peabody, and Merrill Lynch provides a diverse background for experience.  First-hand exposure to fascism, socialism, and communism as well as the completion of a U.S. Army military intelligence course in the 1960’s have inspired a continuing interest in selected topics in science, military, and economics.  He can be e-mailed at rmatison@msn.com
Copyright © 2006 Raymond Matison - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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