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FRONT PAGE CONTRIBUTOR

The Veneer Wears Ever Thinner and There is Nothing Underneath

To watch the declining US economy is to see the possibility that we simply came to the end of a cycle which means it is time for the pattern to repeat. The Good Book speaks of seven fat years and seven lean. A logical course of action involves hunkering down and riding out the hard times as best as possible.

Yet a logical course of action involves trade-offs, costs and other such unpleasantness that prevents logical people from getting elected to office. Thus the government has intervened massively to stimulate spending and consumption. Meanwhile many citizens believe our government is protecting the inefficient, amoral and incompetent from being forced to eat their just desserts.

This has lead to a predictable economic cannibalism, where the favored parties feed off the unprotected. The “stimulus” involves a loud, corrupt and wasteful burn-off of fuel for low mileage in return. Whether we call it eating the seed corn or “Vandal Economics” or even describe the US as a “Snake Eating its Own Tail”, we all describe a pattern where resources are rapidly and inefficiently consumed to feed a short-term palliative agenda. This agenda completely fails to fix the underlying problems that caused our pain and suffering to initiate.

The Stimulus Plan, Cash for Clunkers, TARP, and the entire rest of the response to our economic downturn has taken the form of a massive band-aid designed to manage pain until the problems just conveniently go away and the boom cycle resets anew. What strikes me about the entire economic activity taking place these days is the extent to which it is either coerced or massively subsidized by involuntary 3rd parties who get zero ROI out of the transactions. The 3rd parties forking that money over are taxpayers and borrowers. These are the very 3rd parties these policies were supposed to be “stimulating” in the first place.

Cash for Clunkers may have noble intentions, but it typifies the self-defeating nature of much of how our government has attempted to handle the current economic difficulties. This program involves subsidizing the trade-in of older, inefficient cars so that people will trade-in in “Clunkers” for newer, more environmentally friendly cars. Sales went off to the races, and a lot of people seemed happy at first. Congress had to feed it more money because a lot more people brought in a lot more clunkers than anyone had originally expected. Bonus!

Yet, the program brings consumption forward that would have occurred later anyway. It also redirects resources that people would have either saved or used differently if the government hadn’t subsidized auto trade-ins at this point in time. Bill Bonner, in his aforementioned article, “Vandal Economics,” describes why this will ultimately have a deleterious effect on America’s well-being.

And if you could improve the lot of mankind circa 2009 by crushing cars, why not crush them all? And knock down London and New York too. Think of the boom that would accompany the rebuilding!

Obviously, it doesn’t work that way. Replacing broken windows, or crushed cars, takes resources away from some other uses. This unseen effect is actually greater than the seen effect – the improved market for new cars. Lured by phony price information, buyers send phony signals to the rest of the economy. The automakers produce more cars than they need. Steel, which might have gone to refrigerators is used for car doors. Oil, which might have been used to generate electricity, is used to stamp out fenders.

Savings, that might have been invested in new industries, go to prop up an old one.

James Kunstler takes the questioning of this set of policies one step further. In his article “Snake Eating its Own Tail,” he wonders why we support so many people who were complicit in our current economic crisis in the first place. He takes up the moral hazard argument against “bail-outs” and “stimulus” in an extreme, yet enlightening fashion. Kunstler asks if the “bail-outs” and “stimulus” prevent us from addressing serious issues of waste fraud and abuse by using monetary rescues to wallpaper over some very ugly things.

Notice the two words largely absent from whatever public discussion exists around these matters — “swindle” and “fraud.” The reason they’re missing is because if they happened to enter the conversation, something would have to be done about them, namely investigations and prosecutions. The president is the person in the best position to set the terms of this public discussion, and by avoiding these two words he’s blowing the chance to begin the process of correcting the tragic course we’re on.

These swindles and frauds range from malfeasance at the highest levels to indecency in the lowliest cubicles — i.e. the collusion of a revolving cast of cabinet-level officials with Wall Street executives to loot the US Treasury, the probable criminal dereliction at the mid-level of agencies like the Federal Reserve’s oversight office and the SEC, to certain and outright street grifting in the traffic of securities known to be worthless at their creation. The current fiction that the public seems to be swallowing (for the moment) is along the lines of the old “mistakes were made” locution, which is an easy way to avoid holding individuals responsible for misdeeds.

Kunstler goes on to establish a scenario where the viability of the government is even questioned.

The competence and hence the legitimacy of the US government is on the line here. The US economic situation is going to get a lot worse. Many more people are going to lose incomes and chattels and will suffer, and the moment will arrive when they will direct their anger outward. They need to be told two things: that the borrowed-against future is now here, requiring very different behavior; and that those who received lavish payment for looting the American future unlawfully will be subject to due process of law. So far, nobody has even been fired, let alone officially investigated.

He concludes his wind-up with a pitch that all of this could lead to another “Hurricane Katrina” moment.

It will be the moment when all of America finds itself in something like the aftermath of Hurricane Katrina, when the federal government proves comically impotent and the cold reality hits that we’re now all on our own.

This explains the level of buy-in Barack Obama received in 2008. A lot of frightened and disillousioned people were convinced he could lead them somehow to safety. He can’t because he is unable and because he is also unwilling to do what this requires.

“Bail-outs” and “Stimulus Packages” dance around this question. They are a fraud in the same sense that James Kunstler spoke of swindles and frauds. If everyone can just keep holding on until one day after election 2012, everything will magically start to get better. Yet the veneer and the slickness where thin, and increasingly more Americans see that nothing is there underneath. What then? Our next two elections will be all about deciding that question.

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