Several years ago, I read a book about Generational Cycles. The book was The Fourth Turning: What the Cycles of History Tell Us About America's Next Rendezvous with Destiny. My wife just completed the book and points out that although the book was written in 1997, it forecasts the election of someone like Bush and an event like 9/11. I found the book depressing in that it tells the story of how our misery is pre-ordained. However, it helps explain why it is so difficult to gain traction with the idea of a different system. It is likely that a different system will be better received in the depths of the upcoming depression. While I believe that a different system has the potential to break us out of these destruction generational cycles, history tells us that it will be difficult.
If you insist on staying in the possession/trading system with all its inefficiencies, here is an article by Bill Bonner that has been posted at Carolyn Baker's website. Bill mentions the problems with Ethanol and provides a link to a "letter" on the topic by his associate Addison Wiggin. By the way, the ethanol discussion is right on and should be obvious to anyone who does not have a vested interest in riding the dead ethanol horse for a while longer. (Actually, it should be obvious to those with a vested interest, but our current possession/trading/manipulation system makes it difficult for them to behave in an ethical way.) It should be noted that the diesel manufacturer mentioned in the "letter" is Cummins.
Why is the Stock Market Patterned?
For the most part, consumers judge prices for bread and shoes consciously and reasonably according to their needs and means. When human beings value financial assets, they must contend with a debilitating lack of knowledge and feelings of uncertainty. They contend with these obstacles to a great degree by forming judgments in sympathy with or in reaction to the opinions and behavior of others. This surrender of responsibility makes them participants in a collective, which is not a reasoning entity. [p.25]
So much for "free" markets.
Why does stock market participation narrow and why does the economy expand more slowly in fifth waves? The simple answer to this question is that stock market advances and economic cycles must get weaker before they reverse. The final rise is where that weakness must be evident. Advances come in five waves, so the fifth wave is where the relative weakness manifests.
The mechanism of that difference, I believe, is the immense optimism of major fifth waves, which encourages the populace to engage in financial speculation. Third waves are built upon muscle and brains. Fifth waves are built upon cleverness and dreams. During third waves, people focus on production to get rich. During fifth waves, they focus on finance to get rich. Manipulating money is not very productive. [p.48]
It is interesting to note that books like Atlas Shrugged were written during third waves, but those who defend the principles espoused by Ayn Rand are defending fifth wave manipulations -- because that is the source of their financial support.
As I write this chapter, the "watchdog" of earnings, Standard & Poor's, has just bowed to pressure to change the basis of its earnings reports to "operating earnings" rather than total company earnings so that the reported P/E ratio will henceforth be about half of what it really is. [p.61]
This would be consistent with the manipulation that is characteristic of this era. CPI calculations are another example.
A deflationary crash is characterized in part by a persistent, sustained, deep, general decline in people's desire and ability to lend and borrow. A depression is characterized in part by a persistent, sustained, deep, general decline in production. Since a decline is credit reduces new investment in economic activity, a depression supports deflation. Since a decline in credit reduces new investment in economic activity, deflation supports depression. Because both credit and production support prices for investment assets, their prices fall in a deflationary depression. As asset prices fall, people lose wealth, which reduces their ability to offer credit, service debt and support production. This mix of forces is self-reinforcing. [p.92]
It should be noted that almost all of the "gains" in asset value over the past couple of decades or so have been through manipulation. Currently, governments around the world are trying to delay the inevitable by pumping money into the markets. However, this will only serve to make the depression deeper.
When the volume of credit is large, investors can perceive vast sums of money and value where in fact there are only repayment contracts, which are financial assets dependent upon consensus valuation and the ability of debtors to pay. IOUs can be issued indefinitely, but they have value only as long as their debtors can live up to them and only to the extent that people believe that they will. [p.94]
Congress authorized the Fed not only for the purpose of creating money for the government but also to "smooth out" the economy by manipulating credit (which also happens to be a reelection tool for incumbents). Politics being what they are, this manipulation has been almost exclusively in the direction of making credit easy to obtain. The Fed used to make more credit available to the banking system by monetizing federal debt, that is, by creating money. Under the structure of our "fractional reserve" system, banks were authorized to employ that new money as "reserves" against which they could make new loans. Thus, new money meant new credit. [cont. in following para.]
It meant a lot of new credit because banks were allowed by regulation to lend out 90 percent of their deposits, which meant that banks had to keep 10 percent of deposits on hand ("in reserve") to cover withdrawals. When the Fed increased a bank's reserves, that bank could lend 90 percent of those new dollars. Those dollars, in turn, would make their way to other banks as new deposits. Those dollars, in turn, would make their way to other banks as new deposits. Those other banks could lend 90 percent of those deposits, and so on. The expansion of reserves and deposits throughout the banking system this way is called the "multiplier effect." This process expanded the supply of credit well beyond the supply of money. [p.100]
Following the Great Depression, the Fed and the U.S. government embarked on a program, sometimes consciously and sometimes not, both of increasing the creation of new money and credit and of fostering the confidence of lenders and borrowers so as to facilitate the expansion of credit. These policies both accommodated and encouraged the expansionary trend of the 'Teens and 1920's, which ended in bust, and the far larger expansionary trend that began in 1932 and which has has accelerated over the past half-century. [cont. in following para.]
Other governments and central banks have followed similar policies. The International Monetary Fund, the World Bank and similar institutions, funded mostly by the U.S. taxpayer, have extended immense credit around the globe. Their policies have supported nearly continuous worldwide inflation, particularly over the past thirty years. As a result, the global financial system is gorged with non-self-liquidating credit [a loan that is not tied to production and and tends to stay in the system...consumer purchases such as cars, boats or homes, or for speculations such as the purchase of stock certificates]. [cont. in following para.]
Conventional economists excuse and praise this system under the erroneous belief that expanding money and credit promotes economic growth, which is terribly false. It appears to do so for a while, but in the long run, the swollen mass of debt collapse of its own weight, which is deflation, and destroys the economy. Only the Austrian school understands this fact. A devastated economy, moreover, encourages radical politics, which is even worse. [p.105]
The author recommends investments such as precious metals, bear stock funds, and depositing money in banks that earn high ratings for survivability in a global depression. I recommend a transition to an equity economy where the infrastructure is comprised of quality living environments with small footprints.
Incidentally, as we write, Congress has just passed a drug benefit that is roughly twice as expensive as President Bush proposed. It raises the $45 trillion fiscal gap by $6 trillion to $51 trillion! [Note that this is roughly $171,000 per man, woman, and child in the U.S.] [p.67]
For over half a century, ardent discussions of budget balance have been used as a cover for what is really happening: a massive redistribution from young and future Americans to currently living adults. Our de facto generational policy has been to indulge the present at the expense of children living and unborn. This gives new meaning to "no taxation without representation." [p.83]
...conventional economic notions are turned upside down when considered from the perspective of generational accounting. Take structural tax reform, such as replacing the income tax with a consumption tax that generates the same revenue. Most observers would think that such a policy has no particular generational consequences. Nothing could be further from the truth. Switching from income to consumption taxation is one of the most fiscally conservative policies the government could undertake because it places a much larger fiscal burden on current older generations and a much smaller burden on future generations....
The reason is easy to see. Under an income tax, the elderly, who are retired, pay taxes only on the income they earn on their assets, but they finance their consumption not just from the income on their assets but also by spending down principal. Hence, taxing consumption is like taxing the elderly on their wealth holdings; every time the elderly spend their wealth on consumption, they pay a tax. [p.85]
Economists view such behavior as evidence of intergenerational altruism -- the theoretical proposition that parents (kids) care not only about their own welfare but also about their kids' (parents') welfare. Intergenerational altruism has been tested in the United States not only in the context of living arrangement decisions, but also with respect to annual consumption expenditures. It's been tested using cohort data, data on extended families, data on nuclear families, and data on families in which some members are actively making transfers to other members. Regardless of what data set one uses and what empirical or statistical testing method one applies, intergenerational altruism is very strongly rejected. [p.104]
Since the early 1960's, consumption per retiree has almost doubled relative to consumption per worker. Indeed, when you include all the in-kind health care benefits they receive, the boomers' parents now appear to be consuming more, on average, than the boomers themselves! [p.105]
A final concern is whether firms will cut back on their contributions to DC plans. Ironically, one of the largest administrators of DC plans, Charles Schwab, recently stopped making contributions to its own DC plan on behalf of its own workers. If Charles Schwab can stop making such contributions, with all the embarrassment that entails, any other firm can stop as well. [p.110]
Facts are, however, of little consequence when it comes to religion. And unlike his dad, George the Second is a true convert to supply-side economics. Since taking office in 2001, he has, to repeat, presided over three tax cuts. To his and other supply siders' dismay, revenues as a share of GDP haven't grown. Instead, they've shrunk -- from 20.8 percent of GDP in 2000 to a projected 16.2 percent of GDP this year . [p.116]
Economic logic never restrained supply siders in the past, and it's not likely to restrain them in the future. The truth is that these people never met a tax they like and never met a spending program they really supported -- unless it was subsidizing their own business ventures. [p.117]
During Russia's recent hyperinflation, Russians stopped using the ruble altogether and developed elaborate barter arrangements, many of which continue to this day. [p.134]
Is there anything we can do to protect ourselves? Our answer is a firm yes. As detailed below, we can start saving like mad, invest in securities that are insulated against inflation, and hold assets whose return is not taxed. But the first and most important thing to do is to preserve what we've already got -- and that's harder than it sounds. There is an entire industry -- the financial services sector -- whose primary goal is to separate us from our money. Avoiding this industry's financial malpractice is step one in our self-help guide. [cont. in following para.]
What do we mean by "financial malpractice"? We mean the enormous burden placed on our savings by "the retirement-investment complex" -- the bankers, insurance agents, brokers, mutual fund managers, financial advisers, and employers sponsoring retirement plans -- all of whom purport to be our friends. [p.193]
This "complex" might be even more dangerous than the military industrial complex as the complexity and sexiness of it distracts us from our current predicament.