An Economy of Addiction

When it comes to addictive drugs, most people would be surprised to learn that nicotine (common tobacco) is more quickly addictive than heroin, morphine or crack.  But there’s another drug that even more addictive than nicotine:  free money.

Oooo, we love that free money, don’t we?  More than heroin, coke, crack, tobacco, alcohol, or even ice cream—free money is truly America’s “drug of choice”.

According to the September 15^th New York Times, “the Commerce Department reported that retail sales had surged in August as consumers swapped old cars for new ones under the “cash-for-clunkers” program.”

National retail sales “surged” based on the government subsidy of “cash” (free money) for “clunkers”.  But would August retail sales have “surged” without the government subsidy?  No.  If government subsidies wither, will retail sales fall?  Yes.

Is government paying for these subsidies with cash on hand or are they paying with money borrowed in large part from foreign lenders like China and Japan?   A:  borrowed money.

What happens if foreign lenders stop or substantially reduce their loans to the U.S. government?  A:  Subsidies will be reduced or eliminated.

Have foreign lenders warned that they are about fed up with subsidizing the U.S. economy by making loans that will never be repaid?  A:  Yes.

What happens to our economy if we run out of subsidies (free money)?   A:  Decline is certain; collapse is likely.

In essence, the August “retail sales surge” is based on government hand-outs of free money that it doesn’t have but instead borrowed.  Gov-co is using its Master Card to pay off its Visa to pay off its American Express.

The August sales surge is therefore an illusion intended to inspire unwarranted confidence in our domestic economy.  The strategy is simple:  If gov-co can create the illusion that our economy is strong, businesses will begin to expand, hire more employees, the employees will buy more “stuff”—and the economy will be “magically” restored to working order.

However, this strategy has an obvious problem:  The retail sales “surge” was based on the economic equivalent of giving the people a dose of meth amphetamine.  Yes—thanks to gov-co “speed”—America is moving a little faster, but our economic acceleration is induced by the “drug” of seemingly “free money”.

Can this economy continue to “surge” (or even maintain) without more “speed”?  Probably not.  Worse, is the economy already too addicted to subsidies to survive without subsidies?  A:  Probably.

NYTimes:  “Congress passed an $8,000 tax credit for first-time home buyers last winter,  as a dose of shock therapy during a crisis. . . . As many as 40 percent of all home buyers this year will qualify for the credit. . . .   Analysts say the credit is directly responsible for several hundred thousand home sales. . . .  Skeptics contend that the tax credit is likely to become one more expensive government program that refuses to die.  The real estate industry wants Congress to extend the credit at least through next summer [and to] expand the program to $15,000 and to allow all buyers, not just those who have been out of the market for at least three years, to qualify.  Now the question is becoming whether the housing market can function without it.”

Hellooo? Am I the only one who remembers that the near crash of 2008 was triggered by the subprime mortgage problem of 2005-2007?   Wasn’t that subprime mortgage problem precipitated by gov-co (Fannie Mae & Freddie Mac) subsidies given to mortgagees who couldn’t afford their mortgages?  If so, how will a $15,000 gov-co subsidy to all potential home buyers in 2010 differ from the subprime mortgage “incentives” (subsidies) offered in 2005-2007?

If the “free money” subprime subsidies of 2005-2007 nearly precipitated a global economic crash in 2008, why would anyone suppose that a $15,000 mortgage subsidies in 2010 won’t have the same result?

Does anyone care that today’s $8,000 mortgage subsidies and a possible $15,000 subsidy in 2010 are fundamentally identical to the subprime mortgage subsidies of 2005-2007?  Not the real estate industry.  Why?  Because the real estate industry is populated by a bunch of addicts.  They are addicted to government free money, and like any other common crack whore, they’ll sell their own kids (or this nation) to get their next “fix” of free money.

The housing industry is already “addicted” to a government “bump” of $8,000 per new home.  But where is the $8,000 “bump” (perhaps $15,000 in 2010) come from?  Foreign lenders?  If the $8,000 subsidy is directly responsible for the sale of “several hundred thousand home sales,” wouldn’t the current housing industry be a ghost town without  government subsidies?  How truly strong can our housing industry be so long as it depends on gov-co “speed”?

The housing industry is not alone in its addiction to free money.  The NYTimes reports in “For Obama, a Chance to Reform Wall Street is Fading” that President Obama had hoped to restore regulatory controls to Wall St. to prevent the kinds of excess and fraud that contributed to an near-collapse in 2008.  However, as the economic crisis seems to moderate, Wall St. is increasingly unwilling to accept additional regulation.  Why?  Because Wall St. has had a big taste of all the billions of “free money” that they can steal from investors and the billions they can beg from the gov-co.  Wall St., more than any other single institution, is addicted to “free money” and has become the mother of all crack whores.   They will not give up their drug of choice—not even to save the Union.

Amazingly, the S&P 500 is now up more than 60% from the recent lows. Never before has the stock market risen so much off an economic low in such a short time. Usually, by the time the markets rise 60%, the economy would have already created over one million new jobs.  However, during our recent 60% stock market rise, instead of creating 1 million new jobs, the US has lost 2.5 million jobs.

How was this alchemy achieved?  By the injection of hundreds of billions of dollars of “free money” (speed).  America has been “drugged” into re-investing in the stock market.

Speed freaks can sometimes appear very impressive in terms of their enhanced and almost super-human energy and capability.  But, inevitably, “speed kills”.  Those individuals who depend on speed, enjoy a “hot” year or two, and then they wither and die.  Can an industry be any different?  How ’bout a nation?

NYTimes:  “For policy makers in Washington, the significant question will be when to begin unwinding the myriad lending and guarantee programs [free money subsidies] that were hastily created in response to the crisis.”

In other words, gov-co is trying to decide when it can declare that the economy is strong enough to continue on its own without the aid of government subsidies.  That’s not an easy decision to make because it’s ultimately based on an assessment of how addicted the U.S. economy is to the gov-co pusher’s “speed” (free money).  If gov-co cuts off our supply of “speed” too soon or too suddenly, the economy may crash like a junkie forced to quit “cold turkey”.  On the other hand, if gov-co waits too long to “wean” us from government “speed,” our economy may become so addicted to (seemingly) “free money” that Americans become not only incapable but absolutely unwilling to give up our “drug of choice”.

CPA Vern Jacobs reports at his International Wealth Protection Monitor:

“When you add up the roughly $11 trillion of federal debt, the disputed shortfall in Social Security of as much as $13 trillion, an even larger projected deficit of almost $30 trillion for Medicare and various additional unfunded federal obligations, the total estimates of total federal obligations range from $65 trillion to $100+ trillion.”

Mr. Jacobs’ analysis is consistent with my own estimate that each American man, woman and child’s “fair share” of the total American debt would be about $250,000.  How much “speed” will government need to inject into the body politic to cause every living American to work hard enough to cough up an “extra” $250,000?

A:  It’s not possible to pump enough “free money” into the economy to generate an extra $75 trillion to pay off the existing debts.  It’s not possible.  There are not enough drugs in all the world to sustain America’s current high.  That means the “high” must end and the addicts are going to have quit—in most cases—cold turkey.  The resulting screams should be deafening.

NYTimes:   “[B]etween financial rescue missions and the economic stimulus program, government spending accounts for a bigger share of the nation’s economy – 26% – than at any time since World War II.  The government is financing nine out of 10 new U.S. mortgages. Buy a General Motors car and you’re buying from a company 60% government owned. Borrow for a car loan or run up your credit card, the government probably is financing both your debt and your bank. And if you buy life insurance from the American International Group, your insurance company is almost 80% federally owned.”

Point 1:  Gov-co has become the single biggest factor in our economy.

Point 2:  Other than legislation, regulation, aggravation and paper dollars, gov-co produces nothing.

Rhetorical Question:  Can an economy survive if it’s single biggest economic “player” produces nothing more tangible than paper dollars?

Insightful Question:  Are paper dollars America’s most important product?

Answer:  For most of the past 40 years, dollars were America’s most important product so long as the world used dollars as its “reserve currency”.  However, today the world is searching for another “reserve currency”.  That search tells us that the world’s demand for dollars is no longer insatiable and that our “most important product” is no longer very important.

Implication:  Americans will soon have to learn to produce something tangible like steel, automobiles, computers or food to replace the sagging market for intangible, intrinsically worthless dollars.

Our massive government employs about 20 million people.  Like government itself, most of its employees make little productive contribution to society.  They want to own homes, but they don’t build homes.  They want to drive cars, but they won’t want to work the assembly lines in Detroit.  They want to eat well, but they won’t dirty their hands growing or picking food.

According to the Rand Institute,  these gov-co employees are, on average, being paid about double what they might earn honestly in similar private-sector jobs.  Gov-co pays its help double by extorting the extra money out of the people who actually work for a living in the private sector our our economy.  As a result, the people who actually build homes are taxed so much (in part, to allow gov-co employees to buy homes) that many home builders (tradesman, laborers etc.) can’t afford to own a home.  Similarly, the people who build cars are taxed so highly (in part, to support government employees’ desire for cars) that the actual car assembly line workers can’t afford a new car.  Food is much the same.  To feed the gov-co’s privileged employees in the style to which they’ve become accustomed, people who grow and harvest our food may have to go hungry.  Government, which produces nothing, enjoys a disproportionate share of that which is produced by those who work for a living.  Those who work for a living are disproportionately denied the fruits of their own labor to support the non-productive government.

Do you suppose that these gov-co employees will willingly surrender their gov-co subsidies?  Do you suppose they’ll voluntarily consent to a 50% pay cut so they’re only paid what they earn?  Will they agree to see their pensions cut?

No way.  Those 20 million government employees are so addicted to government “free money” (being paid double what they’re worth) that they will scream, shout and riot if anyone tries to force them to quit their “drug of choice”.

About 45 million Americans receive Social Security benefits.   Another 34 million depend on food stamps. That’s 79 million more Americans who insist on their “right” to have their lips permanently grafted to the public tit.  Do you suppose those free-money addicts will surrender their “right” to gov-co “speed” without a riot?

No way.

And then there’s General Motors, the real estate industry, and Wall St. financial institutions.  Once they’ve had a taste of “free money,” do you suppose they’ll even resist (let alone overcome) the resulting addiction?

The truth is that at least one-third of the U.S. population is directly addicted to the gov-co’s “free money”.  The productive two-thirds of the population can’t afford to support the one-third that believes itself “entitled” to free money.  The free-money addicts have become a cancer on our society.  However, if we make those addicts quit “cold turkey,” many may actually die.  There will be riots and “cities aflame in the summertime”.  All of the nation will suffer.

On the other hand, if we don’t rid ourselves of the free-money addicts, the nation itself may die.  We are truly caught between the rock and the hard place.  There will be no painless escape.

Can you maintain a family if one-third of the members are addicts?  Not usually.  How ’bout a business?  Not for long.  How ’bout an airline where one-third of the pilots are addicted to crack?  No way.

Why should a national economy be any different?  How can the USA maintain some semblance of economic strength, if one-third of its people are addicted to free money and occupying roles that are, at best, non-productive and, at worst, parasitical?

America can run, but she can’t hide.  As a people and as a government, we have committed several generations’ worth of enormous mistakes.  Like Blanche Du Bois in A Streetcar Named Desire, we are now reduced to “trusting to the kindness of strangers” (like China and Japan).  And just like Blanche, we’re headed for a very painful day of reckoning when all our trust in government and its foreign creditors is finally shown to be groundless and foolish.

How else can it be?

Gov-co may be able to postpone our “day of reckoning,” but they can’t prevent it.  Soon, the supply of “free money” will be exhausted.  When that happens, our  free-money, gov-co-subsidy, shop-til-you-drop, borrow-borrow-borrowing system will collapse.

There’s no free lunch, no free drugs, and no free money.  One way or another, bills (even for “free money”) will come due.  When those bills can’t be paid in cash, there will be chaos and even catastrophe because, one way or another, those bills will be paid—if only by reducing the borrowers to a state of abject poverty.  Most of us will survive that day of reckoning, but the process will still be excruciating.

If you happen to be one of millions of Americans currently addicted to government free money, I suggest you “dry out” now and find another means of support.  It is inevitable that government will default on most of its promises.  When that happens, those who are “trusting in the kindness” of government (and its foreign creditors) will be devastated.

Even if you’re not directly addicted to gov-co, you’d still best get ready for tough times.  After all, can a house stand that’s divided between fewer and fewer producers and more and more addicts?  I can’t see how.

And what’s government’s current strategy to save the economy?  Push more free money to create more addicts.  The self-destructive consequences of this insanity are obvious and inevitable.

Despite Washington’s and the Federal Reserve’s cheerleading, prognosticator Gerald Celente recently warned there is “no economic recovery”—only an economic “cover-up”.   This “cover-up” is maintained by the dispersal of unprecedented piles of free money (“speed”) to paper over and conceal our economic reality.  America is being thereby “drugged” into the delusion that our economy is “recovering”.  Our national intoxication can’t last much longer.

Buckle up.

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