Monday, March 9, 2009

The Economic Meltdown is not over...

So anyone with a 401k account or a stock portfolio knows how bad this has been. Many people I work with have lost close to 70% of their total contributions into their retirement accounts!

How did we get here?
In a word, spending. Spending is ok, if you're spending within your means. We, however, are not. Anyone with any sense at all knows its a bad idea to max out your credit cards. It is even worse to continue to open new cards when you dont have the money to pay what you already owe. As far as the country is concerned, we have a running tab called the national debt. In the 2008 Fiscal Year, 9.2% ($261 billion) of the government's spending was allocated for Interest on the nation debt! This figure will be higher and higher every year if we cannot pay down our debt (which is impossible at our current rate). In addition to the budgeted spending in that fiscal year, the government also recorded a bloated $240 billion deficit (which gets tacked on to the national debt). Every time we pass an unbalanced budget or ask congress for more money for one thing or another (such as our efforts over seas) the money is essentially printed up and thrown on our tab.

Crouching tiger, hidden inflation...
The underlying plague to our governments financial system is very powerful, and very underestimated. Inflation is a perpetual drain on the income of everyone in our country (except the bankers and the government who get to use the newly printed money before it loses value). Inflation rises more rapidly than wage increases, and as a result, we're often losing money even if we're getting an annual raise!

The Federal Reserve often targets an annual inflation rate of somewhere near 1.5%, and their reports usually show them to be somewhat on the mark in most cases. the problem is, the calculations are questionable at best. They are essentially designed not to show high inflation rates! The lower they show inflation rates to be, the higher they anticipate consumer confidence in the markets. If they announced true inflation rates, it would draw attention to the mass printing of funny money and that the dollar is slowly but surely being diluted down to nothing.

Ways inflation numbers are "rigged":

1 - In the early 1990s, "hedonic quality adjustments" were introduced into inflation calculation which allowed a certain amount of subjectivity into determining the price increase of consumer goods. This gave the power to the Bureau of Labor Statistics to fudge the numbers a bit to make it seem as though prices were not increasing as quickly as they really were.

2 - Starting in 1983, the government began measuring the price of housing based on rental price, not actual cost. Since rental prices do not raise as quickly as home values this also helped to underestimate the rate of inflation. Now that housing prices have tanked, we'll see if they switch this back to the actual value to achieve even lower inflation rates.

3 - The government also began to assume consumers would make substitutions in the purchases when the prices increased. If the price of steak went up, they began to assume people would not buy as much steak and go for chicken or pork instead. The issue is, we're adding more subjectivity into the equation. They should be using the numbers as they are, not picking and choosing like this.

There are other tweaks and adjustments that have been made to the calculations over the years. The end result is that the real rate of inflation is much higher than the reported figures. In most cases it is estimated that the actual rate of inflation is as high as threee times what it is reported to be! We all know it to be true when we see the prices in the supermarket and take notice. You probably wouldnt even notice at all if the annual inflation rate was only 1 or 2 percent. You can tell the difference because it is actually much higher than that.

Bandaids for Cancer Patients
You dont give a cancer patient a bandaid, but somehow we see fit to give our dying economy the exact same treatment. Bailouts are bandaids. Stimulus packages are generally bandaids. Lying about the state of the economy to help "market confidence" is a bandaid. These things address the issues at hand

Why it's not going to stop

Both the Bush, and the Obama administration have vigorously attempted to spend our way out of this mess which was caused by spending too much money. Spending money we dont have dilutes the currency and causes inflation. Of course we hide the inflation figures so people are still nice and confident and continue spending money instead of eliminating their outstanding lines of credit and paying down their debt etc. Lack of savings makes it harder for individuals to recover from tough economic times which further contribute to the problem.

There are very few politicians that see the big picture. One of them is the famed Texas congressman Ron Paul. He has been avidly protesting the constant unbalanced budgets we pass as well as the ongoing costs over seas, the bailouts, the stimulus packages etc. etc. etc. He has been fighting this fight for decades and is finally starting to be respected as a result of this monumental crisis. Unfortunately, there are still many people at the top who are greatly benifited by our corrupt financial system.

How can we fix it?

We need to take this much more seriously.
1 - STOP spending money we dont have! If we have to stop fighting wars overseas and stop giving aid to countries who want our help then that's what we have to do to save our country. If we have to encourage non-profit groups to step up and assist with healthcare instead of giving more government handouts and welfare, then that's what we have to do to save our country. No more bailouts, no more stimulus packages, let the banks who mismanaged their money fail. Let the home owners who purchased beyong their means lose their homes. As terrible as all of this is, it will flush the bloated system
2 - Stop hiding the truth from the American people. Stop hiding inflation figures. Start reporting true money supply.
3 - Stop diluting our currency. The more money we print up, the more we dilute the USD. If we can get a grip on money supply and get some control over the Federal reserve, we might stand a chance.
4 - Follow the constitution. If we just stuck to the gameplan our founding forefathers put together, we would have avoided all of this. We gave the Federal Reserve (a private institution) authority to print money at will.
5 - Keep the internet open and free! We cannot allow a censored version of the interenet to emerge like in China. This will give the government the power to keep this type of information from reaching people, since the large media companies are owned by those who stand to gain from our corrupt and broken financial system. You may think this should not be a concern, but pay close attention to proposed legislation related to regulation of the internet and you will begin to see that this is in fact on the table, and it will take a constant fight to keep it off.