What’s wrong with a VAT?

Even good liberals like Alice Rivlin are now on board with a VAT (reference).  It’s the stylish thing to do.  It’s clean, it taxes Consumption, and leaves all that money not spent free for Investment….  It’s regressive, but we can overlook that, can’t we, like we’ve been doing with all other major tax changes for the past 30 years?

But—Investment where?  Unless the government wants to also get into the dicey game of capital controls—which would almost certainly plunge the world into the Greatest Depression post haste—the money will likely flow overseas, to economies where growth is high and returns are saucy.

And the dying middle class gets one last wallop before going extinct, transmogrifying into a serf class.  The rich are laughing all the way to the bank….

The continuing collapse of effective demand

The inequality of wealth and income are strangling the economy.  There is no healthy circular flow of income and product.  The failure of demand will increase as the households back down from the unsustainable and historically anomalous 70 percent of GDP consumption levels financed by home equity lending.  Forty-one percent of the unemployed have been out of work six months or more.

Final sales to domestic purchasers continue to slump.  The wealthy will invest overseas, where rates of return are higher, especially if the dollar weakens.  Domestic demand is at 2007 levels in nominal terms, as the dollars buy less due to

Industrial production is at decade ago levels.

Risk aversion as proxied by the Baa minus 3-month T-bill spread remains at Great Depression levels.  This probably reflects the presence of “Knightian uncertainty,” the term that economists use to describe levels of uncertainty deriving from agents not having any probability distributions they believe in because they are confronting problems of a nature and on a scale they have never experienced in their lifetimes.  It is the limitations of living human memory that drive many long-cycle models.

The Fed may lower short-term rates, but if the spread doesn’t narrow, the market hasn’t bought into it, in other words, and Investment will be majorly impaired. 

Animal spirits or confidence levels are struggling to get back to positive.  Assuming a flat unemployment rate until the Presidential election, a collapse of confidence in 2013 seems assured, as continued political dysfunction dispirit the American people. 

The animal spirits + yield curve model shows no collapse of confidence in the next 12 months, qualifying this to mean no negatively skewed change in our current situation of depressed output levels and about zero to two percent real growth rates.

My judgment is that we will have a deflationary collapse within the next five years as the debt overhang overwhelms consumers and the federal government.  After that, the risks of war increase exponentially, as history shows that the quickest way to get an inflation going is to start (or expand) a war(s). 

As Paul Farrell points out (here) The American people have no one to blame but themselves.  They would rather defend their right to be pigs than accept that everyone needs to share the burden of sacrifice for this nation—if there still is an American nation at all. 

The American people have bought into the wrong dream at this moment in history.  The collapse is coming. 

Prepare.

The D.C. pledge of allegiance

Reading Joseph Stiglitz over at Washington’s blog (link--read) who’s now talking about the unraveling of the social contract and the rule of law made me think of a bit of foolscap I’ve had on my computer for a few weeks.  I offer it without apology, insisting that I wish the real pledge were more accurate at this historical juncture:

I pledge allegiance to the law, and to the ruling class for which it serves,

our people, above the others—infinitely divisible—with sham democracy and breadcrumbs for all.

Plantation nation

I-1098 went down in one of the most liberal states in the nation.