International Economics

International Economics

This zine will be based on the study of economics and its appliances in the world economy.

The pillars of the economy are crumbling.

Your life is going to change in ways you cannot imagine. Many of those upper middle class supporters of Barack Obama are going to find themselves without a job in the coming years. Many of John McCains supporters are going to find that his immigration policy was based upon a profound lack of understanding of the core issue, and their taxes will skyrocket. Eighty million baby boomers will find that the well is indeed dry, just as they need it the most. Those in favor of universal health care will find that it was but a pipe dream based on access to health care for more people, at a cost we are in no position to bear. And yet none of the candidates is talking about it.
2008 is the watershed year. The beginning of a financial crisis the likes of which has never been seen in the history of advanced economies. The numbers are staggering. According to the comptroller of The United States David Walker, we are currently underfunded by about twenty trillion dollars. I would argue that Mr. Walker's numbers are low. He made these statements in 2007 before the onset of the sub-prime crisis which is going to lower the value of assets in houses. The number one asset of most baby boomers. I would also argue that when the millions of baby boomers begin to retire, their spending habits will change, further aggravating the problem.

Ross Perot talked about the impending debt crisis sixteen years ago. He was a man ahead of his time. And now, just as these bills are starting to come due, the leaders of our country are talking about spending more money. Some want to spend money to expand government programs, others want to add more citizens to the dole with an amnesty program. Either of these options would accelerate the disaster, both together will crush the economy under a debt burden that is all but impossible to repay.
Perhaps most troubling is that it doesn't have to be this way. As a student of history, I can tell you that other countries have faced trying financial times. Adenauer in post World War II Germany, Roosevelt during the hopeless days of the early 1930s' and Thatcher in England when the Unions controlled the economy. The path is clearly lit.
The United States does not face an insurmountable economic problem in the short term. If we can avoid perpetuating the housing bubble, and let prices fall to a more historically correct level, we can come out of the current situation largely in tact. That is a big "if". The pressure on politicians and Bernake is to extend the bubble. The Federal Reserve made this same mistake in the 1920's with another Ben's (Strong) "coup de whiskey" to extend the stock market bubble. As you will recall, that led to the crash in '29 and the subsequent Great Depression.
But Ben Bernake is a student of the Great Depression, and an intelligent man. I truly believe that he is not trying to extend the bubble, but trying to prime the economy for a much more important reason, we must have job growth. If unemployment spikes to anywhere near double-digit rates, the game is up.

And here we have the solution to the bigger problem. Jobs, real jobs that increase productivity, will strengthen the economy.
Our greatest short-term challenge is our faltering economy. Lowering interest rates to spur capital investment (not to perpetuate a bubble) will help to create real jobs. Increasing our competitive advantage in the global market will also create jobs, and grow our economy in real dollars. We can do this with a simple and massive effort to de-regulate business. Correspondingly, this will also solve the in large part the illegal immigration problem. This is the aspect of illegal immigration that John McCain and most of the Republicans don't understand. Much of the hiring of illegals is not wage driven, or supply driven (lack of workers), it is an effort to circumvent the heavy regulatory burden of small business. The regulatory burden on small business is over $7,000 per year per employee. A small business can actually pay an illegal worker $2 per hour more than an American citizen, and still make more money. If we were to offer a short-cut to citizenship for these illegals, we would be driving ten million people on to the welfare roles and unemployment lines.

But what do we hear from John McCain and Barack Obama? Amnesty from Senator McCain and a throwback to Smoot-Hawley protectionism from Senator Obama. Two programs that are perfectly conceived to lead to another Great Depression.
We should also address the price of oil. Oil is a commodity like no other. By its very nature, it affects the price of every other commodity. If the price of pork bellies rises, the price of wheat need not change. A crop failure of oranges in Florida, doesn't have a big impact on the price of lettuce in California. When the price of oil rises, everything rises. With a stroke of the pen, Congress can mitigate the looming economic disaster. By drilling for oil in Anwar, and much more aggressive drilling in the Gulf of Mexico, we can quickly increase the supply of oil, and lower the price. Those that would argue that increased burning of fossil fuels will lead to global warming in the latter part the century should take note, starvation can kill you in days. There is still time to fight the global warming problem, there isn't any time left to fight the onslaught of debt, and inevitable economic meltdown.
I would also argue that a sizable dose of Keynsianism (deficit spending) is not out of the question, and historically cannot be seen as dangerous at this point. We cannot borrow for more than a few years, and while we are borrowing, every dollar must go in to the creation of competitive enterprise, and productive employment. Our GDP to public debt ratio is manageable for a few more years, but just barely.

The second and even bigger problem facing our nation is the influx of baby boomers. We have promised nearly eighty million people Medicare and social security benefits. To solve this problem we will need to reverse the deficit spending as soon as the economy is on sound footing. We will also need to undertake massive cuts in federal spending. An overall cut on the order of ten to twenty percent is the only thing that will work. A three trillion dollar federal spending budget, in a fourteen trillion dollar economy with a twenty trillion dollar long term gap, is simply (and logically) not sustainable.
To lower the amount of money we need to borrow in the short term, we need to begin these cuts in government spending immediately. Most of our overseas troops will need to come home. We simply don't have the money to sustain a war in Iraq, Afghanistan, and military bases dotting the globe. We can no longer look for dragons to slay, and must abandon the ways of the Neocons in favor of the old ways of dollar diplomacy, balance of power, and perhaps loss of influence in some corners of the earth. This is not meant to castigate the Neocons. They have surely made the world a safer place in many ways. But again, the well is running dry. Good ideas become foolish ideas when they cannot realistically be implemented.
Social security payments must also be cut. A cut of 2.5% next year, and a subsequent cut of 2.5% the following year, coupled with a cut in administrative overhead is the only way. If you are on social security, or will become eligible for social security in the next fifteen years, this is the only way. You can run the numbers yourself. If these cuts are not implemented, your payments will cut by more than 40% in ten years. The Federal government spent nearly 1 trillion dollars in benefits to retirees (largely social security and medicare) in 2007. This was the last year before the first baby boomer became eligible. The math will not work any other way. Either endure a slight cut now, or a massive cut in a few short years.

The proof is right in front of you. Simply open your eyes.
The Sharper Image has declared bankruptcy and Starbucks stock is in decline. Why? Because these companies cater to people with plenty of disposable income. You are already well aware that your disposable income pile is shrinking. These are simply the early indicators of coming tough times. They are not however proof of a coming economic crisis.

Great Depressions are never caused by a single event. They are always the result of several smaller issues conspiring to create a catastrophe. In the last Great Depression the cause was precipitated by a pop in a speculative stock market bubble, coupled with a protectionist tarrif that raised prices on cheap imports, the dust bowl, and in Europe (and perhaps most significantly) the ramifications of the Versailles treaty.
Today we are faced with a housing crisis that will precipitate a lowering of disposable income (home equity is often tapped for spending sprees), rising oil costs, and a heavy regulatory burden on business. These issues are coupled with a spendthrift government and wide spread military obligations.

Many of these issues will begin to play themselves out on a much broader scale just before the presidential and congressional elections in November. The looming chaos will become clear in the eyes of most everyone. Are we nominating leaders capable of addressing this crisis?


They don't even acknowledge the problem, how can they be expected to solve it?

Alas there is good news! A sober, intelligent leader, without the shackles of political debts to pay, could fix these problems quickly and with no more than anecdotal suffering. The anecdotal suffering caveat is just a forewarning of what you will see from the press. This will be your first indication that the solutions are working.

Here is exactly what these leaders must do.


1. Liquidate the bad debt. Bigger bubbles just burst bigger.
2. Cut government spending by at least ten percent
3. Massively de-regulate business
4. Increase and maintain FDR's social safety net (sorry Ron Paul supporters, These are good things).
5. Disentangle the military everywhere possible. (Not as a foreign policy, but as a logical cost savings).
6. Fix the economy now!. (Short-term borrowing is ok, if accompanied with the spending cuts)
7. Find the top of the Laffer curve (Maximize revenues)
8. Drill for oil in Alaska and the Gulf of Mexico (There is no short-term alternative.)

The scope of the financial crisis is massive, the complexity is minimal.

Here is exactly what will happen if we do not do these things. The numbers do not lie.


1. Huge increase in the unemployment rate
2. Huge increase in the debt (as opposed to short rise, and drastic falling of the public debt)
3. Minimum of 40% cut in social security and medicare payments
4. Huge cuts in the salaries of teachers and other government workers (leading to worse teachers).
5. A more global war we are not equipped to fight. (global economic depressions invariably lead to wars).
6. Real tangible poverty (hunger mostly, the houses won't sit vacant for long)
7. An increase in the popularity of tyrants with simple solutions.
8. Widespread social unrest as the safety net is de-funded.

If you doubt a single word I've written I invite you to read a few books. I don't take things I read at face value, I research where I have questions. If you do the same, you will see that I'm offering nothing more than what history has already taught us.

Freedom from Fear by David Kennedy
Modern Times by Paul Johnson
Hard Times by Studs Turkel
General Theory of Employment, Interest and Money by Keynes
The Road to Serfdom by F. A. Hayek
A citizens guide to the economy Thomas Sowell
A Tree Grows in Brookly by Betty Smith (To buttress your spirits)

Here is what I think should be done.
We must work together to find a viable third party candidate. This person should have little or no political affiliation (preferably never run for public office at the national level). The reform party is built on the foundation of fiscal discipline. I do not believe a balanced budget amendment is feasible at this point, but other than that, the core is spot on. We should put the ultimate pressure (dollars and votes) on Democrats and Republicans to go to their conventions with an open mind. We must not be afraid to talk about the problem, only then can we formulate the solutions. Many in the media talk about "talking down the economy." If there is a hungry bear in the room, not talking about it won't make him go away.

We really should have hope. The American man and woman have a long history of rising to the occasion. We are much tougher than we believe even in ourselves. But we must open our eyes and start fixing things today. I didn't vote for Ross Perot. I didn't want to waste my vote. I was wrong he was right. The debt train he talked about in 1992 has left the station and it is time to prepare for its arrival.

Author:
Eric Gurr
egurr@intralinkinc.com
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Comments

Eric, I completely agree with you that a third party candidate is the best option for America right now. Not only would such a candidate (hopefully) be free from the temptations of the Demopublican Corporate Machine but also would show a shift in America's political knowledge and perception, as we would no longer worry about "wasting our votes". This idea of wasting a vote is such a slap in the face to our democracy that it must stop. If you vote on the basis of not wasting your vote, then you are doing just that by not voting for your true choice!

I disagree with you on drilling for oil in Alaska though. We can easily trim our oil use by improving our public transportation system, installing green systems (solar power panels, windmills, etc) and most importantly only use oil when necessary. When we as a country have a sporting spectacle where we watch cars drive around in a circle, we certainly have no need for more oil. Higher oil prices and restrictions on how oil can be used would be good for the long-term health of our society and economy.

Great article overall, even hough I don't agree with all your points it's refreshing to read sound arguments that stray from the beaten path.
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