A Deeper Recession Better Than a Superficial Cure

No.: 
47

The goal of sustainable ecology means little without a commitment to sustainable economics. In economics the biggest issue of sustainability ought to be the right-sizing of an economy. An unsustainable economy is one that booms through the provision of debt additions, the health of the capital markets themselves becoming conditioned on the speculative idea of growth. Our unsustainable economy will in a few years produce unsustainable environmental policies, both coalescing to put us in worse circumstances than we find ourselves now. It would be prudent to begin extracting ourselves from this situation in 2009 rather than waiting until later when the burden of entitlement obligations is higher.

The U.S. economy reached its 2007 size prematurely, bloated by continuing infusions of new debt for consumers, business and government. The growth of this debt laden economic model was not halted until leverage and pricing became unsustainable in housing. This occurred after millions of Americans driven by speculative urges and financial delusions bought over-priced homes they could not afford by any honest calculation. Like a gargantuan Madoff Ponzi scheme, the real estate market began unwinding in 2007, putting at risk borrowers and lenders alike. Now, the challenge for the Obama administration is figuring out what to do with this serious problem — a problem caused jointly by both parties across the years.

The costs of re-inflating an economy that is trying to right size itself naturally are far greater than the potential benefits. Ideally, the nation would come to its senses and realize that it cannot keep growing the economy with debt forever; that is, unless the intention is to inflate away the debt as fast as it is created. Aside from the fact that such policy is politically immoral in its attack upon the soundness of a nation’s currency, an inflation based financial architecture serves to enrich investors in leveraged paper assets at a cost to conventional workers who are only minor capital stakeholders. In a society where capital gains rates for speculative investment are substantially lower than earned income tax rates, this inflationary financial architecture serves to protect the finances of those who acquired wealth through previous speculation. It also defends the winners in previous capital wars against new challenges from those who acquire income through productive services and contributory ingenuity.

If the U.S. remains unwilling to come to terms with its excesses now — its unwillingness having hardened during the Bush years — the unfolding massive surge in government spending will serve to de-privatize increasingly wide swaths of the economy while rebuilding the economy to a size that is only maintainable through even larger infusions of capital. Consequently, four years from now the economy will be bloated even more than it was in 2007 while the nation will be even more dependent upon borrowing than we’ve been for the past several years. Plus, the national debt will be much higher — a debt that must be serviced not only through interest payments but by refinancing it every 3-4 years (the average rate of rollover). We will be faced with the very same threats to our economy and employment that we’re faced with now but we will be disadvantaged in facing those threats because of increased centralization of debt, a smaller private sector relative to the size of the government, a reduced supply of nonrenewable natural resources, an aging population, and increased entitlement obligations. In 2013 we will have to fight for our national sovereignty from a platform far weaker than the one we have now. Good luck.

If we were tackling the problem of right-sizing our economy in 2009 we would have the advantage that the stock market has already right-sized itself. Holders of equity securities are now stakeholders in the money supply at a level much more reasonable compared to the total money supply than a year ago. If equity asset holders at the market’s peak had begun converting their paper wealth into claims on the services and goods of the world, the effect would have been to create great consumer price inflation and to wash out the buying power of wage earners relative to Ponzi game players. This would have been a horrific strike against fairness in the distribution of money power. Happily, the aggregate claim of passive investors on all the goods and services of the world has been reduced, giving new hope to future wage earners. Granted, the broad distribution of asset gains and losses in the working class (relative to the investing class) produces a discouraging picture. Sadly, this will always be the case with the type of financial architecture currently in place.

The right-sizing of the stock market relative to the general economy and the urgency that business feels in reducing debt are positive non-governmental factors that could move us toward a sustainable economy, assuming government cooperates by cutting its spending and balancing its budget. But this is not going to happen. Central bankers and government officials are determined to fight the bogeyman called recession. In so doing they turn themselves into arena bulls that charge at the red cape hung out for them. After they’ve worn themselves out fighting something that is not the enemy of the Republic (a recession), matadors will put lances through vital organs.

A truly consequential third party is desperately needed on the scene. The nation needs an end to deficit spending as well as a limit upon what the federal government can spend relative to GDP. The same constitutional amendment ought to stipulate that federal debts must be paid off within 20 years of the time they are originated, just as Thomas Jefferson argued. Furthermore, we need a new economic model that differentiates between (1) economic growth that weakens us by consuming vital nonrenewable resources without sufficient benefit, and (2) economic growth that reflects prudent incorporation of business efficiencies and ecologically sound technological advances. The Republican Party never understood this while they were in power, making party leaders’ criticism of the Obama budget sound hollow.

We must move rapidly from crude oil dependency to a renewable energy model featuring solar, wind, geothermal and other environmentally friendly components. Instead of dumping countless billions on banks, mortgage lenders and borrowers, failed car manufacturers, inefficient education models, and people who have an unrelenting appetite for health care services, the spending ought to be redirected toward the operationalization of sustainable and environmentally friendly businesses and services. While the current administration is taking steps in this direction, the shift is inadequate and the expenditures overshadowed by money directed toward propping up the debt-driven, consumptive economic model.

Our two reprobate political parties will continue leading us down wrong pathways until a new party is created in which leaders will foreswear new debt as the remedy for previous debt. Currently, the public does not rally around the minor reform efforts popping up here and there because people don’t believe the efforts will make a real difference. The public is jaded. Someone needs put several billion dollars on the table alongside a fair platform that Americans can recognize as cutting to the heart of our malaise. A strategic party with billions in backing could come from out of nowhere in this environment and win the U.S. Congress and the Presidency in 2012. But if it is to happen, the effort needs to start soon. Anything short of this type of initiative will result in a continuation of the dominant “growth through debt” trend, resulting in the probable loss of economic sovereignty for the U.S. before the year 2020.