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America's fantasyland economics – Time to move on

Updated on January 23, 2011
There are two sides to any issue, but in this case the result is the same.
There are two sides to any issue, but in this case the result is the same. | Source

If the freak show formerly known as American politics has proven nothing else, it's proven that the old concepts of economics are now utterly obsolete. Hilarious as it is to see billionaires masquerading as libertarians, and grotesque as it is to see "liberal progressives" utterly clueless on the subject of capital management, things have now gone beyond a joke.

Ideologies can't solve economic problems any more than rocks can perform surgery. The issues are practical, and the results of attempting to use ideologies to solve economic problems are entirely predictable.

America, which seems to be absolutely determined to enshrine all its economic problems in oceans of useless verbosity, is actually a very good case in point regarding how much economics have changed in the last 50 years. The pity of it is that America doesn't seem to have noticed.

After the Great Financial Crisis, America needs to re-capitalize. That's not happening. Money, and a lot of it, is moving through the financial sector, but has not been put into creating a new capital base. Instead, it's being totally wasted, trying to keep a circa 1900 economic model operational. Unfortunately, the thinking is circa 1900, too.

American capital management over the last 20 years would be an ideal example of how not to manage capital. Sending all the industry offshore simply created a situation where there was a huge vacuum to be filled in terms of capacity to generate capital in the domestic economy. The Rust Belt, the immediate predecessor of this suicidal policy, and already proven that actual economic comprehension was non-existent.

The economy staggered along, mainly on the basis of credit, a housing bubble and some good old-fashioned corruption until the whole mess simply fell over. It was always just a matter of when this was going to happen.

The main reason an economic recovery hasn't happened at any great speed is because the working capital has been largely destroyed, and the credit market is still in a state of shock. The financial sector does have a lot of capital, but relative to the size of the American domestic economy, it' s peanuts. A trillion or so barely keeps the American economy ticking over.

The next major rescue is total mismanagement of revenue. Americans complain long and loud about their tax system, but in practice the system is full of holes. Compared to other revenue systems around the world it’s a fossil, designed to promote tax evasion.

Perhaps most bizarre of all is the interesting claim by extremely rich people that they are somehow being penalized by the obligation to pay taxes. A very large number of them avoid tax as much as possible, and just to add insult to perjury, most of them have government contracts paid for by revenue. So in effect they're saying that they don't want to pay the taxes that pay for their contracts, many of which are worth billions of dollars. Many hedge fund managers sold all their lousy, barely credible mortgages to Fannie Mae and Freddie Mac. Sincerity has never been a problem in the financial sector, in fact, it's never really been an issue.

The system is about as workable as it looks. America is now ideologically entrenched behind the eight ball, "going broke on principle". As an example of stupidity, there are very few precedents in history for this level of incompetence, but those precedents all resulted in the fall of civilizations.

The destruction of America's capital is roughly the equivalent of mass murder. It's a financial holocaust which has decimated in both the workforce and the prospects of coming generations. There are no excuses. Neither "side" of this useless debate can claim innocence.

Without capital, what happens to a capitalist society? The short answer is that it falls to pieces, which is exactly what America is doing.

Absolutely no effort has been made to realign the American economy with the New Economy models which are going to be necessary by the middle of the century.

  • Health, pharmaceuticals and education are absorbing huge amounts of capital which could be better used in the domestic economy. The idiotic idea of "charging anything for everything" has been a total failure, which has systematically impaired all sectors of the American economy from both damage control and development. Cutting costs in these areas would be worth billions of dollars a day.
  • The revenue system is in chaos. Instead of imposing unavoidable blanket indirect taxes and developing a federal system of state funding based on those taxes, the ancient pedal-powered, paper technology taxation system staggers on. The result is that all the states have massive budget deficits and are utterly clueless on how to shore up their revenue systems.
  • American businesses are still lumbered with massive overheads as a result of the insistence on old business models. Americans could be outsourcing to other Americans, but apparently this novel idea hasn't occurred to anyone. One of the major reasons for outsourcing in the first place was cost, but cost is based on efficiency. In effect, American corporations were prepared to accept cost-inefficiency for so long that even the idea of improving their own bottom lines by using technology in production and better structuring apparently didn't even occur to them.

(Ironically, the "High Road" approach, employing high-value workers and achieving relatively much higher-value production was actually developed in America. Typically, America and its illiterate business sector simply didn't pay any attention.)

In economics, there is no such thing as fiction. Economics is a study of reality, not mythology. America is staring a USSR-type meltdown in the face. The question now is whether there’s anyone in America competent to deal with this issue.

At the moment, the answer is no. Old solutions can't solve new problems. Congress is currently kicking a dinosaur, and wondering why it won't get up. The fact that Congress hasn't recognized, or condescended to acknowledge, the incredible number of huge weaknesses in the American economy reflects no credit on it whatsoever.

Stupidity is its own reward. Either America gets its act together, or pays the price. The result is likely to be something very like some of the less enchanting areas of present-day Mexico.

The only bit of poetic justice likely come out of this situation is that the "vested interests" which had spent so long protecting themselves from reality will most likely be destroyed as their capital base collapses. A single instance of hyperinflation could totally annihilate even billionaires.

All due respect to Paul Krugman and Nouriel Roubini, to which they are fully entitled, but I think they're optimists. To achieve any of the things they’ve suggested would require rational thought, and there is no indication that either Congress nor the extremely insular corporate sector is capable of that.

If you're an American, I suggest looking at New Economy business models and staying well away from the falling towers of Mammon. You might want to consider exporting of services overseas into safer economic environments where people can actually pay for those services.


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    • profile image

      Charles Hilton 5 years ago

      Outstanding synopsis!

      Actually, I've even considered expatriating. And I still might, depending on the factors influencing my decisions.

      Way up and across!

    • Hello, hello, profile image

      Hello, hello, 7 years ago from London, UK

      Absolutly brilliant summary of the situation. Thank you for an interesting read.