Economic Warfare

[Brian Hanley]

The total size of the precious metals market is just not that big and the same goes for the supply. That is one basic reason we went off the gold standard - our money supply needs were just too big. Precious metals today are fundamentally industrial commodities. Otherwise, it's a psychological hedge against devaluing currency. Shorts do the world a service. They are the carrion eaters of capitalism. They can't eat carrion until it's already dead.

A better way to look at the whole situation is this:

Value is created by productive work in the context of reasonable demand, thus the economy is well modeled by a leaky balloon. The rate of work going drives a rate of value creation. That is countered by the rate of decay of the value created, which can be thought of as entropy.

In the current economy we have some serious basic issues aside from structural finance problems. The most basic is that the baby boomers have been driving a high rate of value creation, but the leading edge of the boomers are reaching retirement age. Unfortunately for us, retirement is a non-value creation activity. It consumes value, but creates nothing. As the number of non-productive value consumers swell, the rate of value creation going into the economy drops. That slows growth and can reverse it.

Since, in a capitalist society, we depend on the valuation of the work engine (corporations) by the marginal dollar buys, as soon as the money going into our financial markets needs to go out more than it needs to go in - big problems.

Fundamentally, there are only three ways to solve this problem.

A. Non-boomers can become 3 times as productive. But in a system dominated by tight energy supplies that is impossible. It won't happen.

B. Boomers can be gotten rid of. This requires ending their lives in something like Kurt Vonnegut's "Suicide Parlors", making it very attractive and fun. This also isn't going to happen.

C. Boomers can stay in the workforce and forget about retiring. For most, this is possible, if unpleasant. The tough part is going to be keeping boomers motivated to be productive in their peak value occupations, or to retool for other high value occupations.

Aside from that? We are in for a long, tough sled.

[Dayuhan]

The eventual and inevitable retirement of the boomers will certainly have an economic impact, but there are some positives to the equation as well. Retirees consume, but do not produce. By consuming they create demand for goods and services, which in turn creates employment. As boomers age they will create jobs in health care and services that have to be locally delivered, and as they retire they will cease to compete in the employment market, which adds up to more available jobs locally. As boomers retire they will create vacant positions that have to be filled; if you're young and unemployed, as so many are these days, that's not a bad thing.

Changing demographics have an impact on patterns of supply and demand. That impact has positives and negatives; it's not a blessing or a curse, just a change that we have to adapt to. This is not exactly unusual, it's happening all the time.

PS: Re precious metals, one of the odd quirks in gold markets in the last decade has been the emerging impact of demand for physical possession of gold coming from India. Seems to be a cultural thing; a tradition that when Indians get wealthy they are supposed to own and hold gold. I don't suppose that this will last forever, as it's a fundamentally irrational drive: gold in a vault doesn't earn interest and doesn't do a great deal for the owner. In the short run, though, prosperity on the subcontinent will mean greater demand for gold, even during the kind of expansion cycle that you'd expect to drive gold prices down. How much price support this will provide is anyone's guess at this point, but it is a part of the equation that isn't always considered.

PPS: The PS above is based on conversations in the Dubai gold souk; I'm not a precious metals expert by any means and I wouldn't consider that to be an authoritative comment!

[Fuchs]

That's a good example of the mad U.S.American "our demand drives the economy" thinking.

Economy is about supply and demand. You need more than mere demand to increase it. An increasing share of non-productive citizens requires a changed distribution of income. The U.S. isn't exactly renowned for its readiness and competence in distributing income socially.


I wrote this in Feb 2009. Maybe it helps.

Sometimes it feels like (military-interested) U.S.Americans don't understand the (inter)national scope of the economic problems.
Old recipes (more consumption, cheap money) are still getting promoted, and the economic illness is often considered to be merely a problem of incompetent management or companies.

Bad news: The whole U.S.American economy was crap for many years - not just Wall Street.

Let's take the 2008 figures:

CIA World Factbook:

GDP:
$14.58 trillion (2008 est.)

GDP - composition by sector:
agriculture: 1.2%
industry: 19.6%
services: 79.2% (2008 est.)


$14.58 trillion times (19.6%+1.2%) means an
industrial & agricultural production of $3.03264 trillion

U.S.Bureau of Economic Analysis
(= U.S. Department of Commerce):

U.S. trade balance 2008 = $ -0.677099 trillion
(goods about -0.821, services about +0.144)

Total services export in 2008 was $ 0.551 trillion - you cannot double that quickly. There's no demand for such an expansion in the world. It's obvious that the U.S. can't balance this trade deficit with an expansion of services exports.

Exchange rate changes won't help at the necessary scale as well - one becomes always more expensive when exchange rates change; either export or imports. The crisis is global anyway - the countries can't simply pull each other out of the mess.

It's about goods; industrial products mostly (the U.S. won't be able to export an additional several hundred billion $ worth of raw materials or agricultural goods).

The industrial output is the key here.

Now let's look at the figures again; the deficit of 2008 was about 22.33 % as large as the U.S. industrial & agricultural production of 2008.

Well, it doesn't look like the U.S. industry will soon begin to expand much (albeit it will recover from the ongoing crash somehow, sometime).

Now let's look at the dimension of the problem:

The population of the USA PRODUCED ABOUT 18.25 % LESS GOODS THAN IT CONSUMED AND INVESTED in 2008.
(consumption + investment = production of 3.3264 trillion plus net import of 0.677099 trillion (and I used trade balance instead of goods trade balance - minimally less accurate, but more meaningful). 0.677099 trillion / 3.709739 trillion = .182519. I also kept the marginal carry over effects out; this is no dissertation.)

I didn't cherry-pick the sources; both are official U.S. sources (selected for convenient access for the readers). Go and check the links if you don't believe me.
It's not anti-American spin - it's official U.S. statistics (and pre-2008 statistics didn't look much different).

There's simply not enough national income to afford private consumption, public consumption and investment at the old (or even desired) levels. A compromise is necessary.

You cannot reduce the consumption of raw materials and half-finished products much without a further reduction of industrial output.
You cannot easily reduce public consumption of industrial goods for infrastructure purposes (most of them weren't imported anyway).
You cannot reduce recapitalization in the economy (that would strangle the industrial output in the medium and long term).
You CAN reduce private consumption and some public consumption, though.

In the end, we're likely talking about a reduction of about ONE FIFTH in consumption - unless an industrial miracle happens (massive expansion of U.S. industrial output) and/or a world trade miracle happens (which would be necessary to sustain the trade deficit for more than at most a few more years).

"Stimulus packages" won't help much (if at all). They can AT BEST reduce the loss of industrial output. There's not even talk about raising it beyond 2007 levels with stimulus policy.

***U.S.American readers only***
Imagine this: You can expect to buy one seventh to a quarter less in stores in 2015 than in 2007.
Something feels wrong? You're right, the U.S. economy of the past was wrong, very wrong. To borrow isn't the same as to earn - it never was.
***done***

Meanwhile, I still see discussions about how many expensive warships to buy, how many expensive fighters to buy and similar military expenses.

I have bad news for the U.S.Americans: You cannot afford it. You weren't able to afford your military/lifestyle for many, many years.

Do you want to reduce private consumption by even more than a fifth in favor of stable or rising government consumption (military spending is consumption in macro-economical terms, no matter what right-wing nuts might tell you about its economical effects)?
No? Then don't spend insanely on the military!

The Afghan cavemen and North Korean starving children won't invade you, I guarantee for that! You're allied with many of the major military spenders and military powers of the world - seriously, there's no need for going broke (even more) by spending more on the military than all other countries together!

The "can do" attitude won't help much, at least not until the problem is understood and the worthlessness of many old recipes recognized.


Maybe I should rather cry about this than to be fascinated and amused by pointless discussions - my country is in huge troubles as well due to stupid economic policies (the other extreme; too much export, not enough domestic consumption) and our public didn't get it yet, too.
Well, at least we're creditors, not debtors. That feels a bit better. For now.

The last bold emphasis was to avoid the impression that this was an anti-U.S. diatribe. It was a combination of facts and ranting against illusions and ignorance.

The trade data has slightly changed since I wrote the text.

The services balance had a stable surplus of $ 10.3 bn to $ 13.2 bn for years.
(Goods and services balance combined yield the trade balance.)


The deficit went down from $ 64.9 bn in July 08 to $ 25.8 bn in May 09 and is again on the rise; $ 40.2 bn in Dec 09.

$ 40 bn per month - that's almost $ 500 bn trade deficit per year if it became the new average (despite the trend upwards). The world trade system is not going to sustain this for more than a couple years. The next crisis is around the corner.

A full scientific study would be much larger, more accurate and have much more detail. Nevertheless, I hope the point is visible even with this rudimentary coverage: The West is in trouble because of unsustainable imbalances. It's less wealthy than it believes to be. It's at a slightly similar point as the Soviet Union was in the 80's (and we're in AFG, oh irony).


The U.S. problems are mirrored by UK Southern European problems (the latter problems are in part caused by the Euro monetary union).


The Western World still thinks that this economic crisis was about Wall Street and the "city" (London financial district). It isn't. It's the noise of the first failures of a system based on unsustainable levels of illusion, imbalance and waste.



About the thread topic: The U.S. is waging economic warfare against itself with illusion-driven economic and foreign policies in my opinion.

[Dayuhan]

Economy is about supply and demand. You need more than mere demand to increase it.

Of course, but without demand (both domestic and foreign) you can't increase or sustain an economy, and when demand shrinks the economy shrinks with it, as we've all seen recently. Production and employment cannot be sustained if there's no demand for the goods and services being produced. Demand for goods and services is only one part of the economic picture, but it's a very critical part.

An increasing share of non-productive citizens requires a changed distribution of income. The U.S. isn't exactly renowned for its readiness and competence in distributing income socially.

I'm not quite sure what that's supposed to mean... who is supposed to "distribute income socially"?

I'm not going to try to go into the overall spectrum of strength, weakness, threat, and opportunity for the US economy, because I haven't the time or patience to write a book. It's neither as weak as some fear and some hope nor as strong as some fear and some hope, if that makes any sense at all.

[Fuchs]

The problem is that too many people equate rising demand with an improving economy.
That's simply not true as long as it's sustained by a trade balance deficit.

We should look at goods output (+ goods trade balance). The goods output is really the basis of the economy, not how much you go shopping with a credit card.

[Dayuhan]

Can't have a whole lot of goods output unless somebody somewhere is doing some shopping. Somebody needs to buy the goods that are being put out.

For the last 2 decades Americans have done the goods producers of the world a massive favor by serving as the profligate consumers of last resort. It's a difficult and thankless job, but somebody had to do it. Have to wonder who will pick up the torch when Americans finally wear out... the youth of emerging Asia have potential, they know how to spend!

Not saying that production of goods is insignificant, but services work too, as long as somebody's willing to pay for 'em (that is to say, as long as there's demand). There's a place for both in any economy. Of course that's coming from an American who's living in Asia and selling services mainly to the Middle East... the beauty of a globalized globe!

For me the single greatest economic problem the US faces in the long term is a perverse education system that insists on churning out people - including many university graduates, some with advanced degrees - with no employable skills. Then we wonder why we have college graduates driving taxis, and college graduates who can't get middle class jobs. We have more graduates in sociology and political science, literature and philosophy, than any economy can possibly use, but even with unemployment at 10% you can't find machinists or precision welders. The average age of an American heavy equipment operator is 53... for years it's been almost impossible to get young people to train for these jobs, even though they pay well. We'd rather send them to a mediocre college to get a degree in the history of labor that qualifies them for nothing but professional discontent. Technical training is one area where the Germans are way ahead of the US, from what I hear at least... but I rant. To make a long story short, any economy with more astrologers than astronomers has a real problem, and the US is definitely in that class.

Possibly I've been around this stuff for too many years, but I've rather lost the ability to panic, or at least the tendency to panic. Yes, there are crises looming; there always are. Yes, there have been stupid policy decisions all over the world and all kinds of economies all over the place face major issues... I've never seen it any other way, anywhere. Always there is someone in the corner shaking a large rattle and howling of imminent doom... usually a lot of people, all prophesying doom from different directions. I have a feeling we'll get by, though not without the usual mess.

[Fuchs]

Can't have a whole lot of goods output unless somebody somewhere is doing some shopping. Somebody needs to buy the goods that are being put out.

For the last 2 decades Americans have done the goods producers of the world a massive favor by serving as the profligate consumers of last resort. It's a difficult and thankless job, but somebody had to do it. Have to wonder who will pick up the torch when Americans finally wear out... the youth of emerging Asia have potential, they know how to spend!

See; first line was OK, though trivial.

The rest sounds badly like the usual "consumption drives the economy" myth.
This is a chicken-egg problem (at best), except for the fact that we know that the egg (production) came first.

Consumption drives an economy much less than investment - something that the U.S. has neglected badly. Investment is the counterpart of savings, after all - and the U.S. savings rate was close to or below zero for years (there are small statistical problems, though).

It's no service to others to accept a part their production output for the promise of paying back without the ability to pay back and then invest much of the foreign wealth into inefficient projects that yield a high percentage of loss.

There's no such thing as a "consumer of last resort" in economics.

The right thing to do is to go for sustainability. This means either reduced goods consumption or increased goods production. The current model of an inflated service sector, a huge fiscal deficit and a huge trade balance deficit doesn't work. It's the path downhill to the next crash in much less than the usual 8-11 years.

The U.S. needs to get away from the "consumption dives the economy" myth and pay more attention to savings (and thus investment) instead to increase the industrial capital stock (high-tech industry workplaces cost up to a million/job) in order to reach the level of industrial production to sustain its goods consumption trade-wise. Roughly 20% more industry without much additional service jobs would help greatly to correct many other problems as well, such as unemployment, insufficient tax income, pensions troubles, health care GDP percentage and more.

[Entropy]

The eventual and inevitable retirement of the boomers will certainly have an economic impact, but there are some positives to the equation as well. Retirees consume, but do not produce. By consuming they create demand for goods and services, which in turn creates employment. As boomers age they will create jobs in health care and services that have to be locally delivered, and as they retire they will cease to compete in the employment market, which adds up to more available jobs locally. As boomers retire they will create vacant positions that have to be filled; if you're young and unemployed, as so many are these days, that's not a bad thing.

The problem with your analysis is that much of what retirees consume will be government entitlements for which there soon won't be any money. That will probably create additional public sector employment but at the cost of private sector employment. Not to mention the unholy trinity we'll see in the next two decades - namely, the end of the social security surpluses, a huge retirement bubble and an expensive and unsustainable Medicare program (~$40-70 Trillion in unfunded liabilities depending on who you believe.) While there certainly will be some positive impacts of the boomer retiree bubble, those impacts are dwarfed by the costs of promises made to those retirees.

[Dayuhan]

If you assume that retirees will be depending primarily on government entitlements, yes, that looks a huge problem. It's not necessarily so. Even with recent setbacks the US Boomers are the most affluent generation in the history of the planet, and while many will delay retirement until they can get a better price for asset holdings, many of us do have very substantial assets and will be quite able to take care of ourselves.

Age no longer equals poverty, or dependency. Americans over age 50 have a median net worth more than double the American national average, and a per capita income roughly 25% above the national average. They own something like 3/4 of the country's investment instruments and control a very large percentage of the national wealth. Some may end up depending on the taxpayers, far more will not.

[Entropy]

I have not seen any evidence that a substantial portion of the boomer generation is planning for, much less willing or able to forgoe social security and medicare in retirement. If you've got something that provides some evidence and arguments for your position I'd be very interested in seeing it. I've seen nothing which would indicate the boomer generation, as a political entity, has any intention of not receiving the government benefits they believe they bought and paid for.

It's also not just entitlements. The regular budget's been operating for a couple of decades now with bonus income from social security surpluses. The "balanced" budgets under President Clinton, for example, were made possible by that social security money. The future there doesn't look good as those surpluses will soon become deficits.

And it's the future I'm really worried about. A recent CBO report highlights the solvency problem quite clearly and the CBO director, on his blog, summarizes the issue in typically understated language:

A large and persistent imbalance between federal spending and revenues is apparent in CBO’s projections for the next 10 years and will be exacerbated in coming decades by the aging of the population and the rising costs of health care. That imbalance stems from policy choices made over many years. As a result of those choices, U.S. fiscal policy is on an unsustainable path to an extent that cannot be solved by minor tinkering. The country faces a fundamental disconnect between the services that people expect the government to provide, particularly in the form of benefits for older Americans, and the tax revenues that people are willing to send to the government to finance those services. That fundamental disconnect will have to be addressed in some way if the nation is to avoid serious long-term damage to the economy and to the well-being of the population.

That is polite bureaucratic language to say Uncle Sam is heading toward national insolvency. Avoiding a solvency crisis will be exceedingly difficult, not least due to political concerns.

Indeed, the momentum pushing us toward insolvency is powerful, the product of 40 years of policy decisions. The miracle of compound interest makes the problem worse each year. CBO estimates indicate that in 2020 the interest alone on the debt will be somewhere between $700 billion and a trillion dollars annually which will make it the largest federal government "program" after Medicare and Social Security. And that number will continue to grow over the decade after since we'll still be running deficits of $600-700 billion (estimated) annually in 2020.

It's not clear exactly how or when this unsustainable fiscal situation will end. What is clear is that even under rosy scenarios very difficult choices will soon be unavoidable.

One of my "hobbies" lately is examining the effects of fiscal unsustainability on national security and I've come to the conclusion that big changes are inevitable. The debates we have today about force structure and policy assume we will be able to maintain our current level of resources into the future. In my judgment, that is not a safe assumption.

[slapout9]

Latest from W.F.Engdahl and some Economic Warfare in the Ukraine.



http://www.engdahl.oilgeopolitics.ne...nd%20Power.pdf

[Dayuhan]

I have not seen any evidence that a substantial portion of the boomer generation is planning for, much less willing or able to forgoe social security and medicare in retirement.

I didn't say they'd be forgoing the entitlements, I said they wouldn't be depending on them. There's a difference.

We're looking at two different questions: I'm trying to assess the impact of retirement on the private sector economy, you're looking at government finances.

The Government's financial status stands or falls on the health (or lack thereof) of the private sector economy. Given the current fiscal realities, ultimately government will have to spend less, tax more, print more money, or some combination of the above. Government's ability to do these things depends on the private sector economy, which is what we need to be primarily concerned with.

It is true that the US will probably have to spend less on defense, and I do not see that as a bad thing, or as a trend that must necessarily compromise national security.

[slapout9]

I have not seen any evidence that a substantial portion of the boomer generation is planning for, much less willing or able to forgoe social security and medicare in retirement. If you've got something that provides some evidence and arguments for your position I'd be very interested in seeing it. I've seen nothing which would indicate the boomer generation, as a political entity, has any intention of not receiving the government benefits they believe they bought and paid for.

It's also not just entitlements. The regular budget's been operating for a couple of decades now with bonus income from social security surpluses. The "balanced" budgets under President Clinton, for example, were made possible by that social security money. The future there doesn't look good as those surpluses will soon become deficits.

And it's the future I'm really worried about. A recent CBO report highlights the solvency problem quite clearly and the CBO director, on his blog, summarizes the issue in typically understated language:



That is polite bureaucratic language to say Uncle Sam is heading toward national insolvency. Avoiding a solvency crisis will be exceedingly difficult, not least due to political concerns.

Indeed, the momentum pushing us toward insolvency is powerful, the product of 40 years of policy decisions. The miracle of compound interest makes the problem worse each year. CBO estimates indicate that in 2020 the interest alone on the debt will be somewhere between $700 billion and a trillion dollars annually which will make it the largest federal government "program" after Medicare and Social Security. And that number will continue to grow over the decade after since we'll still be running deficits of $600-700 billion (estimated) annually in 2020.

It's not clear exactly how or when this unsustainable fiscal situation will end. What is clear is that even under rosy scenarios very difficult choices will soon be unavoidable.

One of my "hobbies" lately is examining the effects of fiscal unsustainability on national security and I've come to the conclusion that big changes are inevitable. The debates we have today about force structure and policy assume we will be able to maintain our current level of resources into the future. In my judgment, that is not a safe assumption.

Galbraith on deficits. A Government is not a business.....it doesn't need to make a profit because they have the sovereign power to create money.

http://www.thenation.com/doc/20100322/galbraith