"Most people are in arrested development and cannot use logic." Jacob.
"Competition and capitalism are hated to-day because of their tendency to destroy poverty and privilege." William Hutt
"America is unique in that our economy is totally dependent on global charity." Peter Schiff

Thursday, August 4, 2011

Stock market is crashing, unemployment raging. Duh.

Time Magazine wrote a whole article to educate us, Why Wall Street Hates the Debt Deal.

Fox News, on the other hand, writes that the crash is despite the debt deal, not because of it. Despite Debt-Crisis Resolution, Wall Street Plummets.

Given Smiling Dave's blog yesterday that claims all main stream media are just warmed over Pravdas, mouthpieces for the politicians, Fox News is the one I expected. The Debt Deal is great, says Fox. The silly market just doesn't know any better. Yep, that's what I expected to hear from Pravda.

Which is why the Time Magazine article intrigued me. Is it possible that Time Magazine has studied Austrian Economics, or just bothered to state the simple facts, or done some other unexpected thing to get to the truth? Is the article going to explain why the debt deal is a disaster to our economy, and why Wall Street knows it?

Imagine my pleasant surprise when that is exactly what happened. Time magazine lays out very clearly what the problem is with the debt deal, and why it will crush our already badly crippled economy. Let's see it in their own simple but illuminating words:

...the debt deal will increase the level of inequality in the U.S...

Huh? That one landed like a spaceship out from Mars. "Increasing the level of inequality" is a totally new concept to me. Now I know, thanks to Time Magazine, that the ideal economy, the one that will flourish, is the one where everyone is "equal". I imagine that means "has the same amount of money". No wonder Paul Samuelson loved the Soviet Union so much. Everyone was equal there.

Enlightened by Time, I now know that equality is good for an economy. But I'm still I'm not sure why, nor why the debt deal increased the inequality level. Really curious, I read on:

Inequality not only caused the financial crisis; it could make the recovery much slower.

Curiouser and curiouser. Inequality caused the financial crisis? I thought it was lending money to people who could not possibly pay it back. Teach me, Time Magazine:

Here's why:

I have written a few pieces about how the debt deal could slow the economy. A cut in spending, be it from consumers or the government, during a recession is sure to cost the economy jobs.

Maybe we will devote a separate blog to why this is a big mistake. But it is not the main point of this article, because Time admits there was no cut in spending:

Still, the direct drag from the debt deal on the economy is unlikely to be that big, mostly because the $2.1 trillion in cuts over the next decade won't really kick in for a few years.

Peter Schiff pointed out the obvious, that it will never kick in, because future Congresses will cancel the cuts when the time comes, as they have always done.

So why is Wall Street reacting so badly in the wake of the deal?

Because... At times in the debt-deal negotiations, it looked like we might get either an increase in taxes for the wealthiest Americans, an increase in unemployment benefits or both. In the end, we didn't get any of those things.

Aha, that explains it. Wall Street was hoping for taxes on the rich and free money for the poor, two moves that will make everyone more equal, Robin Hood style. But that didn't happen, did it. What happened instead?

Instead, what was cut was largely discretionary funds, a large portion of which go to programs that help the poor.

Dang! Once again the poor get shafted, having to stay just as unequal as they were before.

I am not going to discuss the morality of robbing from anyone, even if it is to give to the poor. We will just stick to the dry facts. After all, I don't think stock holders saw the debt deal and cried out, "Oh you odious President Obama, making us unequal like this. How unfair of you. In protest I am going to sell all my stocks at a loss." I like to think that they did it because they perceived it as being in their self interest.

So they must have thought "Uh oh, look at all that inequality. It didn't exist when I bought my stocks, back then we were all equal. But now, for the first time since I've owned this stock, inequality is here. And it will make me go broke if I don't watch out. Better to sell all my stocks, quick." Yeah, that must be it.

Mulling it over. I realized that I had misunderstood things. Inequality has been with us all along. In fact...

income inequality is one of the main factors that caused the financial crisis.
So let's see. Before the crisis we were all equal. Housing prices and stock prices were high for everyone. Then, somehow, somewhere, inequality snuck in. The financial crisis happened because of it. But fear not. In some way, equality rose from the ashes afterward, and that is why we saw those green shoots and won the future and the recession officially ended. We had a jobless recovery, all because of equality.

But nothing lasts forever. Without rhyme or reason, inequality just snuck right back in. And Wall Street sees it is back, and that Obama is doing nothing to equalize us all again. That's why everyone is selling their stocks, because they realize inequality spells death for the value of their stocks. They realize, along with Time Magazine, that "...inequality is haunting this economy. Inequality is probably slowing the recovery as well."

OK, now at least I have the timeline straight. Like Siamese twins, equality and our economy went up and down together. When things were good, it's because we all had the same amount of money. When they were bad, it's because we were unequal. And this equality is a slippery fellow. Like a yo-yo, it just goes up and down at random. That's what Time Magazine is telling us.

But I still don't get, unlike all those wise investors, why inequality is bad for an economy. Aren't there rich and poor in China and Japan and Germany and in many other thriving prosperous countries? And yet somehow they are thriving and prosperous.

And for the religious amongst my readers, doesn't the Bible declare that there will always be poverty, and yet promise prosperity for the world as a whole if people are righteous?

Thankfully, Time Magazine lays it all out. It explains why, as long as someone has more money than the next fellow, we are doomed:

So far most of the gains of the recovery have gone to wealthy Americans. Luxury spending is up. So that helps.

I really feel reassured now. All that was done, starting from before Obama was elected and continuing to this day, the bailouts, the nationalization of GM, the quantitative easings, the many rules and regulations, the constant wars, were not for naught. Wealthy Americans recovered their losses, so much so that luxury spending is up. That helps, and it's good for all of us. I'm so glad all my friends lost their jobs and haven't gotten new ones, because now wealthy Americans can buy more luxury items.

But what has this to do with inequality being bad for the economy? The above makes it sound like it doesn't matter. Give the rich money to buy luxury items, and we are all in good shape, equality or no equality. Luckily, Time Magazine explains. Giving money to the rich is good, but only until they have so much of it they find nothing to spend it on. Then it's bad. After the rich get theirs, we have to start giving to the poor:

But as you put more and more wealth into the hands of fewer and fewer Americans, you get less of a bump from those gains for the overall economy. There's only so much money the rich can spend. Instead, they will take their extra wealth and put it into savings. And what we need right now to boost the economy is spending, not savings.

Now I get it. Until now, President Obama was wisely giving money to the rich. They spent it on luxury items, and that got us green shoots and a jobless recovery, so that we can win the future. But now they have too much. They have no idea what to spend their money on. They save it, perish the thought. And we need spending to boost the economy. So the time has come to make everyone equal again. That way there will be lots and lots of spending, and we will all recover together with the economy. Uh huh.

But it's not gonna happen, explains Time. The debt deal didn't take money away from the rich. It didn't put aside money to create jobs. It didn't lower taxes on corporations and the middle class.....

Wait a second, how did that get in? I thought we need equality. The middle class, by definition, has more than the poor. We should be taking away their money too, if we want equality. And corporations? They are not even people. We should be taxing them to death, as well.

Even more strangely, the article concludes:

So taxes for everyone are going up. And that could be another drag on the economy.

I don't get it. Poor people don't pay any taxes. 50% of the country doesn't pay taxes. So if taxes go up for "everyone", that can only be to give it to the poor, or to "create jobs". In any case, high taxes for everyone but the poor will achieve equality and increase spending, certainly govt spending, which the article is in favor of in these troubled times. So why is Time against high taxes? Ideally everyone should be taxed 100%. That will make us all equal, and will increase govt spending by leaps and bounds, which is exactly what we need, according to Time.

In truth, that last is a mere quibble. The effort of concentrated thought for so long a time must have gotten to Time Magazine. But in the main, the author has laid out his thesis very clearly. We need equality, because the rich have too much and aren't spending anymore. They are saving. The debt deal will preserve inequality, let the rich keep their money, and Wall Street realizes this. It understands that from now on inequality will reign supreme, meaning no more spending, meaning death to the economy, meaning the time has come to unload their stocks.

OK guys, I think I summarized their position accurately, if perhaps mockingly. Tune in for Part Two [hopefully], to see why Time Magazine is totally, ridiculously, wrong.

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