Trapped

by Atash Hagmahani | February 20, 2008

This story (koan) is one of my favorites, so my friends have all already heard it. Here it is for the rest of you:

Each day, a boy from the north temple passes a boy from the south temple as they go their ways to run chores for the monks. They have a little rivalry going. One day the south temple boy asks the north temple boy “where are you going?” The north temple boy answered “Wherever my feet take me”. The south temple boy couldn't think of a good comeback for this one, so he told his master what happened. “The next time he answers you thus, ask him what he would do if he had no feet”.

The next day, the boys met going opposite directions again, and the south temple boy asked “where are you going?” “Wherever the wind blows me,” answered the north temple boy. The south temple boy couldn't think of a good comeback for this one, so he told his master what happened. “The next time he answers you thus, ask him what he would do if there were no wind,” counseled the temple master.

The next day, the boys met again, and the south temple boy asked “where are you going?” “To town to buy vegetarian food for the monks,” answered the north temple boy.

The moral to this story is that there are infinitely many ways to change but only one way to stay the same. The south temple boy and his master keep failing to anticipate and deal with change.

Failing to deal with change seems to be a common problem. While it is true that we can learn from the past, we have to take into account changes that have occurred between now and then.

Our present circumstances are comparable to those of the 1970s. Before jumping to conclusions about what will happen next and what we should be doing about it, we need to figure out what is still the same and what has changed.

Same old war and welfare

The official average inflation rate in the 1970s was 6%. Ostensibly it peaked at 13%. If you look at some of the books and articles of the time, a lot of smart people were expecting it to turn into runaway inflation and then hyperinflation.

The high inflation of the 1970s was caused by the twin devils of war and welfare. One of the main purposes of welfare is to reduce resistance to sending breadwinners off to war (the others being to create dependent, compliant subjects, and to create an altruistic excuse to seize the capital of potential upstarts). One of the purposes of war is to seize natural resources to pay for the welfare, welfare states being capital-destructive. The war in question was in southeast Asia, but it was essentially a proxy war between the USA and a renegade client state known as the Soviet Union. The objective of the war has always puzzled me as the strategic value of the rice-fields was insignificant value compared to the resources and human life being wasted there—but it did transfer wealth to certain politically-connected war profiteers and opened up distribution channels for heroine derivatives. Opportunity costs in terms of the productive and creative potential of expended lives (wars are far more costly than generally realized), veteran's benefits, and the arms race were continued expenses after the war ended in 1975. The welfare in question was President Johnson's “Great Society” programs added to already-existing New Deal programs.

Inflation has several feedback loops that reinforce it. One of them is that expectations of higher inflation motivates buyers to spend money sooner rather than later, or in other words the demand for money falls relative to the demand for goods that it can be traded for—the sooner the better! I believe another way of saying this would be that monetary velocity increases—the same amount of money does more inflationary “work” as it trades hands faster. Another problem is that the expectation of inflation causes interest rates to rise, resulting in ever-increasing interest payments. These feedback loops do not cause inflation; they are processes that cause prices to run out of control.

Core problems not solved

We still have war and welfare, and therefor we still have inflation. I'm not sure how to compare the cost of current wars to past wars, since most of the pertinent information is essentially a secret. My qualitative guess given contemporary propaganda is that current war-spending is catastrophic. It's a little easier to get a rough idea about the direction of welfare spending which I can witness myself just down the block at the local mega-housing-project.

Michael Hodges' Grandfather Economic Report has some interesting statistics on out-of-control government spending and in particular, on the growth of social welfare spending

http://mwhodges.home.att.net/fed_budget.htm

The significant statistic is probably that government spending grows 8 times faster than the economy; that is not sustainable and sounds like a doomsday mechanism.

Mr. Hodges believes that military spending is in decline. I suspect that he is misled by off-budget spending and by increasing fraud and waste; we simply have less to show for ever more spending that the Pentagon does not admit to.

What about “the end of welfare as we know it” under the Clinton administration? It was a ruse. Work-first programs were essentially a scheme to supply politically-connected corporations with subsidized labor. The “earned income credit” is actually a subsidy to those who qualify, take the credit, and do not have any actual net tax due. TANF is available for 60 months but also has indefinite extensions available to those who “qualify”. There are other types of cash payments available in certain states, and others available to certain classes of immigrants. Aside from cash payments, there are still a variety of benefits available to welfare recipients including free or rent-reduced housing, food stamps, WIC, Medicaid, child care, schooling (brainwashing really—a welfare “benefit” available to the general population), and some number of free college credits.

Another type of social-welfare spending is where the recipients paid into the system, but the payments were spent on current consumption back when they were made, and no goods and services were ever stockpiled to be ready for the payout. So, for example, we have payouts to and medical bills to pay for increasing numbers of retirees. In the 1970s, the ratio of productive workers to retirees was much more favorable.

The south temple boy is confounded

For a long time, prices have been rising relatively modestly. They are in fact rising, contrary to the talking heads who claim we have “robust growth with no inflation”. Prices might only have gone up a little, but quality seems to have gone down more than enough to compensate! Personally, I am boycotting a great many shoddy imported goods as not being price-worthy. Prices have also gone up long enough that the difference adds up. Have a look at the inflation calculator at the Department of Labor to see the effect.
What hasn't happened was the hyperinflationary depression as was expected by a lot of smart people—for example Harry Figgie who projected it to arrive by 1995. Neither did we go into the deflationary depression expected by the Prechterites. We have the doomsday mechanisms in place; why hasn't the day of reckoning happened yet?

The north temple boy changed the situation

It's easier to understand what happened if we distinguish between inflation and rising prices. Inflation is best thought of as an expanding money supply. Rising prices are a side-effect of inflation. What most sophisticated economists and investors had hoped for from the late 1960s to roughly the mid 1980s was disinflation. What they expected if they didn't get it was accelerating prices.
What the economic central planners gave them instead of less inflation was a dampening effect on rising prices.

Although inflation was not reduced, there were some token efforts taken at the margins to control it. Ironically, underestimating official inflation creates an excuse to reduce Cost of Living Adjustments (COLAs) for a variety of welfare programs euphemistically known as “entitlements” (the recipients to them being that they “qualify” for them by being a member of the target identity group—we have a strange sense of entitlement in this Age). Another reason is that as unlikely as it might seem, many financial decisions are made according to official government statistics, and expectations of lower inflation help to dampen the reinforcing price feedback loops. I remain suspicious that spending elsewhere more than makes up for it.

Probably the most important thing the economic planners did was negotiated with the House of Saud to keep petroleum prices stable in terms of $US and to devote their profits to so-called “petrodollar recycling”, which helped bid up asset prices instead of the prices of consumer goods.

The inside-the-beltway theory of what causes inflation is the so-called “wage-price spiral”. I refer to it as the belief that inflation is caused by the livestock eating too much grass. This was one of the assumptions they acted on. They implemented offshoring of jobs through international trade treaties, dramatic anomalies in the buying power of various currencies, pressure from the investment banks, and tax incentives.

What has been the impact of offshoring on wages?

There seems to be disagreement regarding whether wages kept up with inflation or not. According to government statistics, most of the time after-tax wages have been slowly going up. Of course, the real inflation rate is in dispute. Instead of getting bogged down in arguments about inflation, let's work from what seems to be the consensus opinion that wages are constrained by competition:

After the collapse of the Bretton Woods system of fixed exchange rates in 1971 the Federal Reserve allowed the money supply to increase at 12% a year or more. That overstimulated the economy and encouraged labor and others to seek larger price increases that weren't constrained, as now, by foreign competition.

...Even if Bernanke is lowering interest rates and trying to pump the economy, all of us know there are people in India and China just waiting to take out jobs. --Daniel Fisher, Forbes magazine

Interestingly, stagnant wages create the following dilemma: either wage-earners decrease their standard of living, which cuts the profits of consumer-oriented businesses, or they maintain their high standard of living using borrowed money. Up to now the latter approach has been actively encouraged, so consumers are still bidding up the prices of goods; its just that they are doing so on borrowed money. As my good friend and frequent Financial Sense contributor Andy Sutton pointed out to me, this puts more high-level control over consumer spending, as someone else has a hand on the supply of consumer credit.

Stagflation?

The question then is not why we don't have stagflation, but why it has taken so long to become painfully noticeable. Prices have been rising moderately since the 1980s inflation was tamed, but they have been rising. The only other ingredient was the “stagnation” part of stagflation. Decades of mal-investment—like building $3/4 million houses for people without strategic skills or any savings—and dangerously accumulating debt have laid the groundwork for stagnant growth.
The day of reckoning is still on its way; the timing has changed because the mechanism of doom has changed.

The trap

Our central economic planners offshored most of our industries, and onshored immigrants to do the remaining service jobs which could not be offshored, to prevent us from having any pricing power over our wages. It's worth mentioning that a lot of service jobs that have resisted offshoring up to now are now ripe for it due to the miracle of over-investment in transcontinental communications; in the near future, the person taking your order for your Wendy's burger might be located in India, and doctors and nurses are already talking to Indians who interpret X-rays. Robotics might take offshoring even further, with robotic surgery being performed by surgeons in another country. Not only do we still have inflation, but now we are at risk of economic starvation. Numerous major employers in the USA hire exclusively through agencies that refuse to serve Americans; if you tried to apply you would be told that they are for the “special needs of recent immigrants” and you would be sent away. This is apparently not considered a violation of US equal opportunity employment laws.

“And our goal is clearly not to find a qualified and interested U.S. worker. And you know in a sense that sounds funny, but it’s what we’re trying to do here. We are complying with the law fully, but ah, our objective is to get this person a green card, and get through the labor certification process. So certainly we are not going to try to find a place where the applicants are the most numerous. We’re going to try to find a place where we can comply with the law, and hoping, and likely, not to find qualified and interested worker applicants.” Lawrence M. Leibowitz, Cohen and Grigsby seminar on how not to hire Americans

Your children will get the same treatment in college when they apply for strategic universities or majors. They will spend vast amounts of money (much of it borrowed) on an education that is economically worthless; the jobs they could not get out of high-school will still be out of reach after college.

This is an attack on your livelihood. There is more trouble coming down the pipeline including a trap waiting for your capital that I will write about next time.

Summary

Your bills are going up. Your wages aren't keeping up, and the continued destruction of real capital is compromising future opportunities.

Strategic implications

Dramatically increase your personal efficiency. Cut your expenses so that you can live on lower wages. I recommend at least 20% savings rates. This is possible for most middle-class wage-earners in the post-industrial countries despite predatory taxation.
Implement strategies to accomplish your life goals with fewer taxable transactions. I know some better ways of doing this than buying municipal bonds (that pay negligible interest) such as are often recommended by the financial orthodoxy.
Be your own boss so that Mr. Lawrence Liebowitz won't have to trouble himself sending you a rejection letter. If you are in a position to do so, hire or partner with your friends and family. Create cooperative networks to avoid being boycotted.
Look for opportunities for non-wage income streams. This is so that you have something to fall back on if you lose your job.
Plan for a non-traditional education for your offspring, with an emphasis on cold, hard economic pragmatism. They should have multiple skill sets at different levels of technology and fundamental demand. Hire them if you are in a position to do so. Put the idea into their heads young and keep reiterating it; remember, the schools (even the private ones) will brainwash them to pursue meaningless academics.
If worse comes to worse, consider leaving your country so that your country's bureaucrats won't have you to blame inflation on. Think of Hank Reardon in Atlas Shrugged. This is problematic since most other countries don't want you either, but there are niches to be occupied.

Atash is the editor of MutuallyAssuredSurvival.com, where you can find ideas for surviving petroleum depletion, globalization, economic starvation, and other hazards of the 21st century.

contact information

Atash Hagmahani | Email | Website

The opinions of FSU contributors do not necessarily reflect those of Financial Sense.

FINANCIALSENSE.COM

Copyright © James J. Puplava Financial Sense ® is a Registered Trademark
P. O. Box 503147 San Diego, CA 92150-3147 USA 858.487.3939