Vol.26 No.2
November 2008
LLB Information Systems, Elon, NC
Copyright © 2008
Through the month of October, the US stock market lost $5 trillion, the global economic system collapsed, and the US economy was deleveraged from a 40 to 1 to a more reasonable 10 to 1 ratio. Furthermore, many stock market investors lost 30% to 40% of the value of their holdings. The reaction by our government financial officials was to convert the biggest private US banks into government sponsored enterprises (GSE) and boost their reserves with a bailout bill of $850B. Now the Federal Reserve System, Fannie Mae, Freddy Mac, and the nine largest surviving banks are being run by the US government.
The problem with the US economy today is its exaggerated disequilibrium state. The following table illustrates the amount of disequilibrium and its impact on employment.
Economic..............Theoretical...............Actual..............Expected Actual
Performance........Max. Sustainable....Performance...Employment
Data Type.............Econ Rates..............Rates................Rates
Federal deficit.............5.86%.................10.2%........53.7% of pop
Federal receipts..........17.93%...............15.66%......46.9% of pop
Federal Public Debt.....60.7%................72.8%........51% of pop
M1 money supply.......17.94%...............10%...........42.6% of pop
M2 money supply.......60.7%.................54.6%........46.5% of pop
M3 money supply.......84.5%.................89.7%........55.4% of pop
Capacity Utilization....90%.....................76.4%........38.5% of pop
Before reacting hysterically to this disequilibrium state as many in Washington D.C. are doing now, we should consider economic theory to plan a reasonable course for recovery. The first thing to recognize is that there is no such thing as a free market system or laissez faire government. Every economy is stimulated by its government to perform at an accelerated pace. Without government stimulation, an economy is naturally constrained to employ 35.4% of its population and can grow only at the rate of population increase. As government stimulation increases, however, the pace of the economy also increases such that more and prompter government regulation or mediation is required to keep the competitive elements working in harmony. Thus, government usually gets bigger to cope with the added protection and adjudication processes required by faster pace economies. The only time government gets smaller is when the public wants lower employment, slower economic growth, and less expensive government.
The worst trap government can fall into is driving employment above the maximum sustainable employment rate of 47.95% of population. Higher rates of employment introduce ever increasing rates of inefficiency in the economy with increasingly expensive output. To deal with these increasing inefficiencies, government must provide ever more protections and adjudications. It must get ever larger and distort economic equilibrium ever more to cope. Hence, there is a maximum sustainable pace economy which governments should never exceed by applying excessive stimulation. That occurs at the “Theoretical Maximum Econ Rates” for performance data shown in the table above.
The way the US government stimulates the pace of our economy is to write checks for deposit in the Fed. In turn, the Fed uses this money to buy US Treasury bonds and to lend to subordinate banks. It buys Treasury bonds from the Treasury and banks to increase money supply and sells Treasury bonds to the Treasury and banks to decrease money supply. It uses the fractional reserve system to multiply the amount of money it receives from the Treasury to boost the pace of the economy. At a 10 to 1 leveraging rate, the Fed can make available nine times the amount the Treasury deposits with them. For example, a $100B check deposited by the Treasury in the Fed could be parlayed into nearly a trillion dollars for lending. The only constraint the Treasury has on the amount of checks it can write is the public debt limit. Over the years Congress has never refused to increase this debt limit.
The two biggest enemies of the US economy besides excessive stimulation are inappropriate fractional reserve rates and free trade excesses. To keep the economy properly leveraged, the fractional reserve rate should be keyed to the federal receipts to GDP rate. Congress determines the nominal rate of federal outlays and receipts. To keep inflation in check, Congress must set taxes at a level consistent with federal expenditures relative to GDP. The optimum tax rates are provided by the Econolibrium Table. Today the US receipts to GDP rate is 15.66% of GDP. That means current financial leveraging should not exceed 6 to 1. The Fed is maintaining the fractional reserve requirement at 10% which means a leveraging rate of 10 to 1. It had been as high as 40 to 1. If the Fed was forced to follow the receipts to GDP ratio for setting the leveraging rate, Congress would be the de facto rate regulator for the country. Then when federal receipts climb to 20% of GDP and leveraging would be reduced to 5 to 1, Congress would be forced by the banks and the public to reduce taxes to be consistent with lower fractional reserve requirements.
Free trade is an ancient fiction. In the past, free trade occurred when armies invaded other countries and took what they wanted without completely destroying populations (goods and services for lives). Today, free trade occurs when banks invade foreign countries and take what they want without destroying the foreign economies (goods and services for economic survival). The cost of the free trade is borne both by the victims and the people supporting the marauding armies and banks. For example, America has been the recipient of goods and services provided by foreign countries for several decades. In exchange, America has furnished huge quantities of dollars. In the exchange, Americans have received wonderful goods and services for their currency of ever declining value. The imbalance is so bad that American industrial capacity utilization has declined to a marginal performance level. With no work for scientific and engineering professionals, our nation’s ability to compete in the technical global economy is seriously impaired. The US has already become a service economy based on financial manipulations of banks that are ever more suspect.
Free trade has driven our economy towards bankruptcy. The theft of a trillion dollars from the Pentagon budget to keep free trade going, the subsequent loss of $5 trillion in the stock market collapse, and the recent $850 billion bank bailout by Congress is the price ($7 trillion total) we are now paying for past free trade. These costs have to be added to the cost of all those cheap but desirable goods and services from foreign countries to get their true costs. Even today, Americans are perpetuating the free trade fallacy by buying foreign goods and services that will drive up inflation and further destroy our science/technology based economy thereby reducing us to a bank driven slave state. Free trade is acceptable only if the value of annual exchanges between countries match exactly and outsourcing tax losses are recaptured by offsetting tariffs on imports.
As long as our government officials continue working to bring about a socialistic new world order, our economy will be volatile, grossly inefficient, and prone to collapse. To bring a stable equilibrium state to our economy, the President, Congress, and the Fed should be working to bring the actual performance rates in line with the theoretical maximum econ rates as shown in the performance data table. They cannot run a 10% federal budget deficit and a 72% public debt rate relative to GDP without inviting serious inflation. They cannot hold M1 to 10% of GDP without squeezing the life out of our economy. They cannot boost M3 to 90% of GDP without attracting all the available US capital and much of the rest of the world’s capital to create another gigantic stock market bubble.
Our book, Universal Economics, still languishes in the federal Copyright Office. Each monthly status inquiry is answered by another excuse for delay and an additional two months before the examiners get around to looking at it. At first we were assured that registration would occur by mid June 2008. Now they say maybe January 2009. This reminds us of socialistic health care practices where patients are discouraged from applying for treatments by lengthy delays in appointments. Of course, the longer the book examination is delayed, the more time the financial community has to prepare and adjust to the compelling academic arguments advanced by the book.
We have opened a blog site www.llbis.blogspot.com under Google. This blog contains our monthly Econofacts newsletters for October and November. Next month and thereafter we plan to include the latest three monthly Econofacts newsletters. Soon, weekly performance graphs and investment data will be added to the blog. Other special site updates may occur at any time during the month. Two months from now, we shall cease distributing Econofacts and readers will have to access our scientific views on economics through this internet blog site.
Three months ago we offered to send a free DVD copy of Universal Economics to regular readers of Econofacts. The response was underwhelming. The lack of interest in scientific economic facts leaves us concerned about the future of America. Most people treat economics as though it was a theological belief system. For example, they believe in a balanced federal budget. President Carter nearly balanced the budget but inflation soared while employment dropped to painful lows. President Reagan restored the economy to stable equilibrium by raising the federal deficit to 9% of GDP. Later, President Clinton attempted to balance the budget again but employment took a sharp drop as free trade temporarily absorbed the inflation. President Bush restored high employment with tax cuts (higher federal deficit) and help from a 1% fed funds rate imposed by the Fed to cover the laundering of the $1 trillion theft from the Pentagon through the housing market that created a housing bubble. Today, Americans squander billions of dollars on Arab and Chinese products but not one cent on helping themselves understand and cope with the economic world we live in. For those interested we are offering our book Universal Economics in DVD form for $75.00 delivered to your USA address. Order the book through our econofacts@bellsouth.net e-mail address.
LLB & KNB
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