Will rising “animal spirits” lead to ruin?

With the decline in the unemployment rate this morning, “animal spirits” improved.  We should see improvement in the Michigan Consumer Sentiment Index going forward, although it has slipped a bit recently.  There is noise in all economic series.

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Even with unemployment climbing to about 11 percent over the next year, confidence will improve until the A metric (reference) actually becomes positive in time for the election, barring a currency crisis or other catastrophe in the meanwhile.  Confidence is one of the primary drivers of the business cycle.  However, given the double-whammy to consumption I noted yesterday from falling wages and salaries and increased saving, and the collapse of investment demand, growth is likely to be very, very slow.

This is bad news, in my view, as it affords the opportunity for the fiscal and monetary authorities to continue to pile up debt on the backs of American taxpayers.  Bernanke and Geithner will continue to bail out the bad debts of some big banks at taxpayer expense, and Congress will continue to rack up world-war-like deficits.

America can not service the debt load it has now.  Credit market debt is about 375 percent of GDP, higher than it was in 1929 according to reliable estimates.  Consumer and business debt is charging off at high rates likely to get worse.  As government crowds out private borrowing, private defaults can be expected to rise even more.  Since a lot of bad private debt of Wall Street firms is being converted into “good,” “risk-free” U.S. Treasury debt, this amounts to a continuation of the greatest expropriation of the ordinary Americans by the rich interests in American history.  Almost none of the high-rolling Wall Street speculators or their institutions have paid any price whatsoever for their trillions of dollars of bad bets.  (There was Lehman, but that was personal, Hank Paulson’s pet revenge project.)  At some point, demand for the dollar will collapse and rising import prices will drive the standard of living of the average American down even further.

We are watching an empire self-destruct in slow motion.  At the end of this process America will truly be a banana republic, with income and wealth inequality far worse than they are now, a hollowed-out state.  As McKinsey notes in a recent study, the human capital of the American labor force is subpar.  How will we climb back out?  The rich are free to invest their money anywhere in the world.

Only a radical reordering of American priorities in the next couple of years will prevent this.  There is no one who believes the Bush-Obama deficits projected over the next ten years are sustainable.  Ron Paul is the only elected politician who is addressing the scope of the change needed.  Everyone else appears to be playing politics as usual, acting as servants to the rich.  Even a five percent surtax on incomes over $1 million to provide health coverage to the poor has been fought tooth-and-nail by our greedy over-class.  The rich in this country have lost all sense of fiscal fairness in the worst crisis in three generations.  Ron Paul is the only politician of any standing who correctly diagnoses the problem, imperial over-reach inevitably leading to ruin.  As a physician, he has even moderated his libertarian positions to support government-sponsored health insurance for the poor, paid for by ending our futile wars.  I would add to that livable workfare for the unemployed to see them through the crisis, which is likely to last a decade or more.

Finally, is the unemployment report real?  Many would say not.  See TrimTabs’ research (here and here) and ShadowStats.  The Labor Department itself shows a decrease in the labor force of over four million in this decade.  Do you believe none of these folks want jobs?  All they have to do, reputedly, is to stop looking for a month and they’re out of the labor force.  The employment-to-population ratio is dropping sharply.  The government is aware of the psychological impact of the unemployment rate number so they manipulate it to keep it down.  The true unemployment rate is already in the teens.  A growing awareness of this reality may undercut the forecasted rise in confidence levels.

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