Tuesday, June 28, 2011

Fiat Fractions and the Economy...Liars and Crooks

If you have been reading my blog, I think by now, you know it reflects my disposition. I am very pragmatic. I would not classify my thinking as overly interlectual. In fact, if I ever get invited to an economic conference, I would have doubts. Did these guys receive their doctorates from the internet? Nevertheless, I do have a natural gift in being able to understand the Ivy Tower and put their thinking into everyday examples.
This intro serves as the background to a report that I just recently read. Ever hear of Marginal Productivity of Debt(MPD)? This is an economic term used to describe the effects of debt that can influence economic growth by government, whether federal, state or local. It shows the amount of money that is spent to produce one dollar of growth.
My first reaction to this report was tell me something that I don't know, but upon further reflection, I saw many other aspects to it.
The article pointed out that nearly 20% of every dollar of disposable income comes from the government in March. This money has many names from Social Security to unemployment checks. These government benefits are also called "transfer payment."
To understand the impact of the report one must have more info on the trend. I borrow the concept from technical analysis. If a stock is rising, the trend is up. It won't change until something affects the basics of the stock like its sales, margins, labor and supply, product saturation, things fundamental to it. You can use science too. A body in motion trends to stay in motion until friction, gravity or similar overcomes the momentum.
Now, back to MPD. In 2006 it took $6.31 for a dollars worth of growth. Going back to the 1980s, the cost of MPD was about 12% according to the US Bureau of Economic Analysis. Back in 1959 when the bureau began covering this aspect, it cost only 6% of debt for a dollars worth of growth. This translates to $1.86 for one dollar. Can you see the trend? And it is definitely negative. Why?
The report stated no particular reason. It did however cite many future concerns because benefits are under scrutiny and on top of that pressures are building with the ever increasing size of the federal government, declining revenues along with the fact that transfer payments will gobble an increasing share when you factor into the equation the baby boomers and Medicare which will compound the deficit which in turn could cause interest rates to rise, resulting in a vicious circle of decreasing returns. These fractions are in negative territory and only getting worse with time.
I cannot argue with the above, however I do think the reason for the increasing cost are related to the other aspects of which mostly are caused by our federal government and the decisions that they have made or not made.
The one chief reason that is outside of the government direction, but still responsible for it, is the exponential growth of the shadow banking industry. Its affects were evident in the financial crisis of 2008. The investment houses, hedge funds and finance companies were as big, if not bigger than the banks within our nation. These unregulated groups along with their unregulated actions like the spreading of CDS(derivatives)which by the way are surpassing $500 trillion dollars and the whole value of the world GDP is only $65 trillion. These idiots are allowed to function when one slip could crush the whole economy of the planet. No one could cover the bill even with centuries to pay it. Keep that in mind when the Republicans say we have too much regulation or think Bernie Madoff. An investment adviser must be registered when you have over 15 clients. Madoff had over 3,000. And then, there is the flip-side to this. We regulate an industry, but with the next election, the new party in power waters down their ability or better yet, put a yes man like we usually have in the SEC and elsewhere. Lehman was declared solid four days before bankruptcy.
Next, the military complex. Since 9/11, we have spent over one trillion dollars in the two wars and all of it will cost more because it all got added to the deficit. Yeah, Cheney, "deficits don't matter!" (past winner of my Ding-Dong Award). No one can put a figure which needs to be added to this: the loss of life and resources which could have served all of us with a better purpose.
Finally, the declining value of the dollar and with Bernanke printing overtime, its value will continue to shrink. This is why MPD is continually costing more to produce one dollar of growth. Not to mention the Obama stimulus package will only put the cost off the charts in the near future. Translation? Yogi said it best," a nickel, ain't worth a dime anymore." Better have some gold, you're gonna need it.
LIARS and CROOKS: Gotta go with Secretary of Defense, Robert Baker. He does not want to be associated with a country that won't run a $trillion dollar modern military. He's taking his ball and going home because "they" won't play by his rules. Yeah, his rules said never negotiate with terrorist, but in his last interview with 60 MINUTES, he said it is possible to end the conflict in Afghanistan if we settle with the Taliban. It shows the military complex is ALL B.S. They have been wrong in everything that they do. Terrorist is fear and FDR sated it best,"the only thing that we have to fear is fear itself." If we only protected our borders 9/11 would never have happened, but one agency after another would not act on the tip that these first terrorist were overheard on a Sat/phone in Yemen and they were followed to San Diego and the whole thing could have ended right there, but NO! These idiots are responsible for the tragedy and the subsequent ten years of pain and loss.

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