Wednesday, April 27, 2011

Reich is Wrong; Debt is the problem not Wages

Today Robert Reich penned a piece for the Huffington Post bemoaning a recession rather than inflation being the biggest challenge facing America. Personally, they are not mutually independent of each other as Mr. Reich would have his readers believe. Telling readers that Wall Street doesn’t understand economics is ridiculous. It is like saying Einstein didn’t understand physics. To Mr. Reich I would say that inflation is the underlying cause of the current recessionary pressures rather than being a separate concern.

Mr. Reich like his progressive liberal readers believe in the “government can fix all that ails America” mantra. In order to keep the economy moving all that is needed is to have the Government spend more money in useless efforts to prop up the economy. Rather than say declining wages are the problem, I would venture a guess that problem is debt. The American government is in debt over $14 trillion or almost 100% of GDP. This by all accounts is unsustainable and places America on the brink of collapse. The Federal Government than leveraged the States by enacting unfunded mandates. States with Liberal governments (California, Michigan, Illinois) are completely leveraged out and have tapped all they can from the taxpayers. The tax payers are tapped out also. Homeowners leveraged their homes by taking the equity and turning it into adult toys to keep up with the neighbors. Now that home prices have fallen there is no place for consumers to turn. No longer are homeowners enabled to spend use their homes as ATM’s, the homes simply are not worth as much as they used to be.

Mr Reich is correct in assessing that consumers are not enabled to spend our way out of the recession. The problem in his analysis is that he blames it on falling incomes. The problem is not the falling incomes, the problem is that Americans were spoiled and were destined to failure because of their spendthrift ways. Americans saved very little and their spendthrift ways borrowed money they simply could not afford to repay without inflation. Americans needed inflated incomes just to keep their heads above water. Now that wages are stagnant and not keeping up with inflation the liberal left, represented by the likes of Mr. Reich, would have you believe that inflation is a good thing and the key to rescue our fledgling economy. If only prices of goods and services rise enough to force employers to increase wages will America be enabled to recover, is a wrong headed approach.

The recession is not the same as the other recessions since the Great Depression. For the most part the other recessions were cyclical in nature. The business cycle will always have its peaks and valleys. The key is to keep the overall trend rising, so the peaks are higher and the valleys shallower. The problem is that this recession was caused due to structural problems. The root cause in my opinion is American debt. The cumulative effect of leveraging every piece of property in the US to the max created bubbles that are now bursting. The problem is now there is no property left in the system to leverage. The last remaining available pool is to further tax incomes which will further erode the buying power of the American consumer.

There is an easy solution to the problem of debt. The American government as well as the States and individuals must again become frugal and clean up their debt problems. We as a country are not going to spend our way to prosperity, there is nothing left to spend, it has all been leveraged away. This is what happens under a system that promotes perpetual debt with ever increasing balances. It is our debt that is causing inflation and stagnating wages. It is our debt that is causing the recession to linger as the economy limps along. It is our debts that are unsustainable and inflation is no way to combat debt.

The American left would have everyone believe that government deficit spending is necessary. The American left believes inflation is good because it makes future payments of present debt less painful. The problem is our indebtedness has created the problem we see today. Fuel prices are rising for multiple reasons. Middle East unrest is part of the problem but so is the liberal lefts viewpoint to allow our own resources to go untapped. However the main reason for the current rise in oil prices is because the dollar is weak. The dollar is weak because the Federal Reserve has artificially kept interest rates low by printing dollars. In other words, inflation is making the value of the dollar much less than it was just yesterday. Along with the increase in the cost of oil, we also have an increase in the cost of food. Food prices are increasing because it cost more money to reap the harvest and also transport the goods from the fields to the processing plants and then to the grocery stores. Finally, wages are stagnating. Wages are stagnant because the American labor force has priced themselves out of the manufacturing competition. Companies are employing more people out of country because the labor costs are less. To me this makes sense, business are in the business to turn profits. However, the left believe businesses should be in the business to create jobs not profits. That philosophy my friends is why the left believes Government is the answer to everything. See if businesses were there to create jobs and could take losses then all would be right in the world.

Again the problem is debt. The debt is the cause of inflationary pressures. Inflation is the problem, we need a strong dollar not a weak dollar. Stagnant wages are a symptom of the debt problem and are not isolated from the effects of inflation. The two are integral problems that are feeding the structural problems we face. America needs to get its fiscal house in order. We must balance our budgets and stop taking on more and more debt. The left is living recessions from the past. The left does not understand ever increasing debt has consumed the ability of the consumer to spend our way out of this recession. Increasing taxes on an already fully leveraged citizenry will only prolong the agony. We must reduce spending now and it must be done in 4 areas. We must reduce Defense spending. NATO has shown to be inept and incapable without US leadership (Libya). Pull out of NATO and reduce the defense budget by the NATO savings ( a significant portion of the defense budget on the order of 25% of the total defense spending). Then tackle Social Security which is out of money. Don’t believe the lies about the money filled lock box. The lock box has no money but is rather filled with more liberal empty promises. Reform medicare and medicade. We need to reduce spending on these programs and we must do it now. The only way to fully recover from this recession and see the day America prospers again is to reduce the debt and keep inflation in check. Hyper inflation is not the right way to go.

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