How Bad Is Our Economic Hangover …
This is the second in our series of what it will take to look at our solutions to our economic woes with new eyes, and consequently, new thinking. We began this series with New Minds, New Solutions.
Do you remember those college or early work days, when you went out and partied all weekend long starting sometime after class or work on Friday afternoon? When you woke up on Saturday, usually around lunchtime, you felt pretty awful and so you st
arted off your day with a beer, which temporarily cleared up that hangover and allowed you to keep on drinking well into the night.
On Sunday you did the exact same thing and started with a Bloody Mary to stave off the resulting hangover and finished off the day with that last martini. But, come Monday morning, when you had to return to class or work, there was no stopping the hangover by chugging a beer or other alcoholic beverage. By Monday, your hangover felt like a freight train roaring into a wall of rock. The more you put it off, the worse it got.
In truth, if you had just taken the first hangover in stride, swallowed a few aspirins, drank water and ate properly, you would have moderated your alcohol levels for the rest of the weekend. Come Monday morning, the hangover, and how awful you felt for just a short time, would have been a fading memory.
Let’s think about this in terms of our economy. When the bottom fell out of the economy beginning in late 2007, early 2008 and continuing well into 2009, the world came as close to reliving the days of the Great Depression of 1929 as it has ever come.
How did we get out of that mess?
After years of long lines of people looking for jobs, food and shelter, World War II happened, and the rest as we often say, ‘is history.’ The war created the jobs, the increased production of food, services and goods. It was followed up by the largest housing boom of the 20th Century, which in turn fueled our manufacturing, auto, transportation and telecommunications industries, as well as our the beginnings of our innovation in technology and science.
But, even in this post-WWII period, the seeds of our current economic woes were being planted. In very simplistic terms, the master strategy that fueled the recovery from the Great Depression was to increase spending – government, business and individual spending. After decades of being a nation of savers – everyone was encouraged to spend. We’ve been on this spending binge – and the resulting hangover – ever since. For the real and very telling look inside the Great Depression, we recommend Murray N. Rothbard’s, “America’s Great Depression,” available through our Amazon bookstore.
When the economy began to tank in late 2007 and early 2008, no one really foresaw how deep the problems would go – Rothbard’s 1977 book offers a sobering account that reflects present day problems accurately – and what it would take to dig us out, and perhaps, clear up our hangover. Looking back at the 60+ years since the end of WWII and the Great Depression, we simply employed the same strategy: spend.
In July 2010, Moody’s Analytics published a paper, “How the Great Recession Was Brought to an End” by Princeton economist Alan S. Blinder and Moody’s analyst, Mark Zandi that details all of the steps taken by the federal government to get the economy back on track. They make a pretty good case for the endless spending that it’s taken to push the economy into recovery.
What’s interesting is that in this study, the authors cite the bursting of the housing bubble as the impetus for everything that followed to derail the economy. But, here’s the rub, in a new study published in May 2014, one of the same authors, analyst Mark Zandi, makes a strong case that no true recovery is possible without acceleration in the housing market.
So, housing got us in trouble, now housing is going to get us out of trouble. What it sounds like is that the many checks and balances placed on the banking and financing industry to keep from creating another housing bubble are about to be circumvented in order to ‘complete the recovery.
Hmmm … does all of this sound familiar to you?
The Baby Boomer Effect
If housing is the final key to full economic recovery and return to full employment, which is predicted by the end of 2016, what impact are aging baby boomers going to have on the housing market, and by extension, the economy?? Here’s something to think about:
America is getting older. Because of the baby boomer and other demographic changes, the number of Americans over the age 65 will double over the next 40 years; 14 million of them will have Alzheimer’s disease. By 2050, elderly will number 67 million, 22% of the population.
Source: NobleCE.com Protecting Your Estate, Study Course pg131 as of 6/18/2014.
Boomers, where the bulk of the wealth currently resides in this country, are not going to be putting money into the housing market – their money is going into healthcare, long-term care and other health-related industries. For many boomers who have already hit retirement age, a new phenomenon is occurring: they are going back to work. Whatever they have saved and invested, along with their Social Security, is not enough for them to be financially secure until they die.
We heard recently from a client that one of his best friends is going back to work at 70 years young. Even after cutting back on little luxuries, like cable, land-line phone service, daily newspaper and magazine subscriptions, etc., this 70-year old found that going back to work was a better alternative than not being able to afford to visit his grandchildren in another state for holidays and birthdays.
Recent research shows that one of the fastest growing population segments is people 85 years and older.
On a global level, the 85-and-over population is projected to increase 351 percent between 2010 and 2050, compared to a 188 percent increase for the population aged 65 or older and a 22 percent increase for the population under age 65.
Source: Living Longer, a report by The National Institute on Aging, update March 21, 2014
It’s a vicious cycle that we’ve been in for more than 60 years. We spend to get out of debt, out of unemployment, out of a stagnant economy – and the hole keeps getting deeper, the hangover worse.
Something For You to Think About …
One solution that we feel strongly about is the first step in the Sound Money Solution (watch the video). If you viewed the video, then you know there are three steps: link fiat money back to gold, take government out of the banking system and close the Central Bank.
Right now, our government leaders would do well to stop printing money and playing shell games with buying and selling Treasury bonds and other government funded financial instruments, to prop up the national and world economy. In truth, these actions are very much behind the mega-economic hangover awaiting some future generation.
Linking Back to Gold
Dr. Robert P. Murphy
“The supreme virtue of the classical gold standard was that it restrained the ability of the government to create more dollars. In the long run, printing up new money doesn’t create prosperity. However, runaway inflation has the power to destroy an economy. So a rule tying the government’s hands with respect to the printing press would be welcome,” explains Austrian economist Dr. Robert (Bob) Murphy.
What’s the possibility that this might happen?
“I think the only way it will happen is if the dollar crashes in the currency markets and we see crude oil zoom to $200/barrel. Then Americans would see the virtue of a “hard currency.” Absent a crisis like that, I don’t think the politicians will ever agree to put handcuffs on their wonderful printing press,” says Dr. Murphy.
In the long run, Dr. Murphy believes that the “only real solution is to get the government out of the money industry altogether. We wouldn’t tolerate the government being directly involved in the production of computers, yet people think it’s natural for the government to have a monopoly on money.”
Following Dr. Murphy’s thought – if you have a SEB system, then you’ve already got the second step in place and have basically gotten the government out of your personal money industry.
However, on a national level, this second step – privatized banking – combined with step three, abolishing the Central Bank, are entirely dependent on monetary policy set by the Federal Reserve and Congress. We’re not holding out for these possibilities since essentially the Fed would be putting itself out of business. Instead, you can do step two yourself and you don’t have to wait for ‘monetary policy’ to change. If you don’t have a SEB system, what are you waiting for??
We agree with Dr. Murphy and feel strongly that just by taking the first step and linking currency back to gold, the country and the world can begin a real turn-around that would force the cost of living down and bring prices back into reality. Remember the Rule of Five – divide the cost you are paying for something by five (5) and you’ll get the cost you ought to be paying if the dollar was tied to gold.
Yes, this would cause an immediate economic hangover, but we suspect that the hangover is a lot better than sitting on an economic time bomb of unknown proportions.
What’s it going to really take to create a complete economic recovery?
“If we’re not worrying about political feasibility, three reforms that would, in my opinion, lead to very strong and sustainable economic growth are: (1) Get rid of the Federal Reserve, (2) Get rid of the federal income tax, and (3) Require a balanced federal budget, said Dr. Murphy.
“My advice is simple yet difficult: People need to work harder and save more. That’s how you dig out of a financial hole. The government should cut spending and cut taxes, in order to restore resources to the private sector where they will be used more efficiently. The Federal Reserve needs to stop creating money out of thin air in order to prop up the mortgage market and subsidize government debt.”
Now it’s your turn.
How do you feel about what Dr. Murphy is suggesting? What do you think it’s going to take to have a real economic recovery? And, how much are we going to have to suffer from the current ‘economic hangover’?
How bad does your economic hangover feel? What would you do if you could create an economic policy/strategy to stimulate a full recovery?
