Building the AmeriCar Market

As we wrote previously, we have a pet theory that the U.S. Federal Government is in the process - deliberate or accidental - of forming a national car manufacturer, owned and operated by the Government. With Chrysler in bankruptcy, never to repay the over $7 billion in loans from the Government, we suspect that the process of forming "AmeriCar" is accelerating (if you'll pardon the expression).

However, as anyone who has actually paid attention knows, most American automobiles suck. It's all well and good that the Federal Government might be running its own car company in the future, but who's going to buy the crap that will - almost certainly - be produced? If the Soviet Union is any indication, the national cars will be impressively crappy... except for the members of the Government, of course.

We suspect that the preliminary methods for corralling people looking to buy new cars will be similar to the "cash for clunkers" programme; older autos can be traded in for a rebate on a new vehicle. It wouldn't be difficult to extend that programme to apply only to vehicles purchased from "AmeriCar." Indeed, an even more draconian move - and in keeping with the "Buy American" mantra of the Obama Administration and Congress - would be to restrict the programme to only American-made cars, on both the trade-in and the new auto. Additionally, we wouldn't be surprised to see hefty tariffs on imported vehicles, to further coerce buyers to get "AmeriCar" vehicles.

Problems of Comparing the U.S. with the U.S.S.R.

We have made several arguments in the past that the United States is following the Soviet Union's path to oblivion. Although we do feel that the basic trajectory is a reasonable one for analysing the U.S.'s descent, we have been giving the matter some thought recently. Some results from this pondering have been critiques of the U.S.S.R./U.S.A. collapse comparison.

First, though, is a proposal we have to offer the Obama Administration, although we expect it would be very unpopular. The first step would be to have President Obama admit the banking system is completely fracked up. He would then nationalise the entire banking system, thus wiping out the stockholders, the bondholders, and all uninsured depositors. From there, two new sectors would be formed: a national system of "good" banks, which would hold all insured deposits; and a trust to hold all the toxic 'assets' in an attempt to wind down the contracts and garner a profit therefrom.

After this schism is complete, the Federal Government would then issue vouchers to every American citizen. These vouchers would be good for stock or bonds in either the 'good' banking system, or in the trust of bad 'assets.' Through this system, the profit from both the renewed banking system, as well as the winding-down of toxic assets, will accrue to the Citizenry, and not to some banking elite or corrupt political toadies.

This voucher concept is not original; it was something that arose from the Soviet Union, in an attempt by the post-Soviet Government to unwind failed economic models and structures. The effort failed, because the Soviet system failed so utterly, but the concept behind the vouchers is brilliant: it distributes the potential benefit amongst the largest number of people, something that the United States desperately needs in dealing with its failed banking system (and automobile manufacturers).

However, we honestly would be shocked if a system of vouchers was ever implemented in the United States. The 'why' is simple: to do so would be a proactive admission of failure, which is anathema to the American ethic. Very few citizens in the U.S. would be able to admit that the entire U.S. banking system is in failure-mode, and needs to be liquidated as rapidly and efficiently as possible. The post-Soviet voucher system would be better a 'cure' than simply tossing vast sums of money indirectly into the over-seas retirement funds of the CEOs.

Americans are not able to understand that something so pervasive as banking could collapse utterly... and they really would not understand that, if the Federal Government were to lose its effectiveness in keeping the zombie super-huge banks limping along, the banking industry would utterly implode overnight. Failure of Government is totally alien to the American Citizenry, whereas it was very familiar to the Soviet populace. Soviets could clearly see that their economic system was non-functional, and cavorting with utter failure. Americans cannot understand that the "American Way" is just as hopelessly flawed as the Soviet's system, and just as doomed to failure.

It is in this great difference between the collapse of the Soviet Union and the decay of the United States that comparisons break down. The Citizenry of those two systems are so incredibly different in skills and outlook it boggles the mind; Soviets were lean, mean, frugal machines... while Americans go ape when they can't park their SUV right at the entrance to the strip mall. Comparative analysis between the U.S.S.R. and the U.S. are still valid, we feel, but it must be done with a caveat: the average American is likely going to suffer far worse than an average Soviet.

Peak Automobiles

CNN reports "Autos on U.S. roads set to fall." This is an unprecedented event. The automobile has been a defining aspect of American life. For most Americans, their first car is a right-of-passage. Likewise, most Americans consider their car indespensible.

The article suggests that the decline is mostly the abandonment of excess cars - moving from three cars in the drive to two. But it also hints at a decline of demand due to increasing unemployment.

Nowhere does the article suggest, as we do, that a permanent decline in incomes will produce a permanent decline in the need for autos. We don't think that view will ever make the mainstream. In the future, decline in auto use will mostly be reported as an increasing preference for urban life - or not at all.

In light of this development, bailing out U.S. automakers seems especially deranged. The industry already had excess capacity during the bubble years. Now it is even more questionable just how much manufacturing capability is needed. Certainly the U.S. Government is in no position to make this decision. Supposedly, that is what markets are for.

Oh wait, there is no market economy any more. If a big corporation with armies of lobbyists is losing money, the market can be swept aside, and Uncle Sam will pull out his teat.

Destroying economic value by perpetuating chronically loss-making operations was probably the main thing that did in the Soviet Union. Evidently nobody in Washington was paying attention at the time. Those who do not learn from history are condemned to repeat it.

Sovietisation Revisited

A recent article in The Sunday Times (UK) discusses creeping dependency on the public sector. In previous posts we have discussed the problem of government spending in a declining economy, and the concern that government's share of the economy may go past the optimum.

It is clear that, at least in large parts of the U.K., things have probably gone well past the optimum. In Northern Ireland, for example, the state controls 77.6% of spending. We are reluctant to 'push the red', but it is looking like the U.K. is heading for economic collapse along the lines of the Soviet Bloc in the late 1980s and early 1990s.

Economies can only function properly if there are many decision makers. If economic decisions are concentrated in the hands of the state, inefficiencies are too great for the system to gainfully employ the population. One need only to look at the history of the Soviet Union to see the failure of that direction.

If these were saner and more rational times, perhaps Britain's demise could serve as a warning beacon to nations contemplating expanding their public sectors. Unfortunately, the siren song of 'stimulus, stimulus, stimulus' sounds too loudly in the ears of the citizenry.

Twilight of the United States?

We've been reading quite a bit recently about the U.S.S.R. Morbid curiosity? Perhaps, dear Reader, but not without an ulterior motive: Soviet Russia was the last major, industrialised nation to have a catastrophic meltdown. That's not to say we necessarily expect such a thing to happen here... but it's wishful thinking to say 'it can't happen' in the United States, or the United Kingdom, or the Eurozone, et cetera.

Such comparisons are not without their merit, especially as the government spending of the United States and United Kingdom are becoming ever-larger percentages of those nations' respective national economies. Large percentages of government spending in GDP are hallmarks of socialism... but if the government is the entirety of the economy, that's soviet socialism.

This potential transition is seen in moves like the U.K. nationalising the Royal Bank of Scotland, or the U.S. taking over Fannie Mae and Freddie Mac. Quantitative easing and monetisation of debt can bee seen as further steps towards sovietism. Perhaps the final nail in that coffin is the comment by Dmitry Orlov, that President Obama is America's Gorbachev. Mr. Orlov is a smart man, and he saw the post-Soviet collapse first-hand. We take him seriously.

Keynesianism Can't Save the Economy

As TIME magazine has noted, "we are all Keynesians"... again. Mr. Keynes has certainly made quite the comeback from the graveyard, and his reanimated fingers are slipping back into the modern economic pie. This is taken as a 'good thing,' a point which we won't belabour. However, if the shuffling zombie of Mr. Keynes were able to take stock of his economic surroundings, he might notice things are a little different now, than in the 1930's.

In 1930, according to usgovernmentspending.com, the United States government's direct spending was 13.22% of the national economy, up from 11.29% the year before. By 1939, at the bottom of the 1929 Depression, government spending was 20.66% of GDP. Not a whole lot by today's standards, as 2008 saw direct spending of 36.59% (guesstimated on the site), but about double the percentage of 1929. Doubling government spending was indeed a shock at the time.

As a vignette of Mr. Keynes makes clear, shock value was very important to him. He was all-around an economic shock jock, as his disciple Paul Krugman puts plainly. Shock is what makes Keynesianism work: the shock of a sudden expansion of government spending in the private economy.

We seem to remember a quote from President-elect Obama (although we cannot remember the source) stating that whatever Mr. Krugman wants, Mr. Krugman will get. He's the Nobel laureate, after all... and he's screaming, "spend!"

Right now, though, the so-called 'economy' of the United States is already about 40% government spending. The "jump-start" effect that Keynesianism looks for may require a doubling of government spending in an economy. At the same time, the United States economy is shrinking rapidly... so the end result of a proper Keynesian shock could leave the U.S. government as 100% of the economy, give or take.

Does this new Congress, or the President-elect, or both, have the political will to turn this country into a new Soviet Union? We truly do not know, but if the economy became the government's, the United States would be as Red as Red could be.

The Impact of Government in a Shrinking Economy

Volumes have been written on the effect of government spending on economic growth. Observers of nearly all political persuasions (anarchists and totalitarian communists aside), believe there is an optimum point of government involvement in an economy. An economist by the name of Richard Rahn came up with his eponymous curve which attempts to use empirical data to plot growth rates in GDP versus government spending as a share of GDP. Unfortunately, Mr. Rahn's methodology's scientific efficacy is debatable, but it is intuitively obvious that there must be some point of optimum (if it isn't intuitively obvious consider this: in a state where there is virtually no government spending, economies collapse as crime and piracy run rampant - e.g. Somalia; and when government makes virtually all the economic decisions you end up with another kind of failed economy - e.g. the Soviet Union).

All other things being equal, the spending of governments would tend to fall along with the economy in the 2007 Depression. As income declines, so do tax receipts. States of the USA have to balance their budgets (more or less) and so must cut spending to match the decline of taxes. The US Federal Government (along with most other national governments) has no such restraints, and much is being made at present of how much deficit spending to make to 'help' the economy. Could too much government spending go past the point of 'help' and into 'hurt'? How much of the economy can be in the government's hands without collapse setting in?

The EU government spending as a percent of of GDP has tended around 50%, while by comparison, the USA has tended around 40%. If the OECD economies contract by 50% and government spending does not shrink along with it, the percentages will rise to 100% and 80% respectively. Obviously, this is well past the optimum.

At some point into the 2007 Depression, governments will likely be forced to shrink. This will not be a matter of libertarianism, but of practical economics. Painful choices will be made, some of them critical. Health care, education, national defense, police, fire departments, food stamps, pensions? Where will the axe fall?

The Sovietisation of America

A recent article in Bloomberg discusses galloping statism around the world. All theoretical concerns aside as to subpar growth, and suboptimal investment decisions - we see the core problem being this: Beyond the domain of rudimentary public services, central planning creates bogus livelihoods in bogus industries. Take airline luggage inspectors. In the USA, the TSA employs about 45,000 screeners, slightly more people than the number of people killed each and every year on USA highways. We wonder how many lives the screeners have saved. Is this truly a good use of scarce economic resources in a contracting economy?

How will real needs be met if jobs are only created within or by the hands of government bureaucracies, and lost elsewhere? If the proposed make-work programs were along the lines of say, public transportation, truly affordable housing, or even beautification for heavens sake, we would not grumble so much. There is, after all, much to be done to make a smooth transition to a less affluent society. But why the largess for roads, auto makers, and ethanol? Soon enough all the highways will be to nowhere, as private motorised transportation becomes impossibly expensive for all but the wealthy.

In the waning days of the Soviet Union "people pretended to work, and the government pretended to pay them." Meeting real needs was largely left to the informal economy. Why do the government of the USA and its imitators want to recreate this tragedy?

An Alternate View of the Depression

Today we discovered a very interesting blog. It is called "Meltdown 2011," and presents what we would call a conspiracy interpretation of current events. The author, a Mr. Scott Gallup, believes the 2007 Depression, or "The Meltdown" as he calls it, is being created intentionally to further the ends of what he calls 'Shadow Powers'. Generally, we discount such a viewpoint, but nevertheless listen to it.

The 'doom and gloomers' have had a better predictive track record than the rest of the population lately, and one could chalk that up to the 'broken clock is right twice a day' effect. On the other hand, given the present economic crisis, the notion that they might be on to something deserves a bit more attention than usual.

If you can navigate Meltdown 2011's enigmatic layout, you will find a treasure trove of 'alternative ' information. We would categorise much of it as more than a little tired, but some of it is original and well-informed, such as it's coverage of issues in the precious metals markets (which was what drew us to the site in the first place).

It is a taxing task to attempt to wrap one's head around vast and complex issues. We ourselves attempt this with open-mindedness, and avoid reductionism. Our opinion is that even if some would-be overlord class is attempting to manage the world's institutions, economies, people and so forth, they are almost certainly not up to the task, and would fail to achieve their intended results. Ultimately, the only functional human systems are those where power and decision-making are widely distributed. Efforts to set up non-functional systems may bring misery and suffering (the Soviet Union again comes to mind), but in time they do collapse.

There are always attempts by politicians, seen and unseen, to grab power. That is what they live for, after all. Perhaps the 2007 Depression will be perceived by the political class as a capital opportunity to grab more power. Perhaps they will even succeed for a time. However, the more vigilant the citizenry is towards attempts to take power from it, and the more prepared they are for such an assualt, the less likely they are to be overpowered. Meltdown 2011 may be going overboard a bit in the vigilance department, but nevertheless it provides interesting food for thought.

Enabling Destructive Economic Behaviour

Although we ourselves are not of the socialist persuasion, we agree with socialists that there are cases where government can actually provide useful services, and at a reasonable cost. So reasonable in fact, that the case for privatisation is not particularly compelling.

Unfortunately, at the national level, the USA seems incapable of delivering that sort of socialism (with the possible exception of the Post Office). Instead it engages in malignant lemon-socialism, where destructive enterprises are rewarded with life-prolonging capital infusions, or outright government ownership.

Take, for example, a number of large banks, Fannie, Freddie, and Wall Street firms. These outfits swindled the world's investors. All issues of criminal fraud aside, their activities were and continue to be enormously destructive economically.

Investors lost confidence in them. Any sane governing authority would simply shut them down. In any sort of free market economy, they would be done already. There are thousands of better run competitors out there to take up the slack. But yet, the Federal Government saw fit to step in and keep them going. Not because no one else was providing some useful service they are. In fact, they aren't producing any useful service at all. Quite the contrary.

Another example is the bailout of the 'Big Three' automobile manufacturers. As stated in a previous post, there are many good, sound business reasons for these companies to go out of business. It's not like there aren't lots of other companies which can make cars. If the USA has a glut of car making capacity, then a fair chunk of it needs to go away.

The core economic problem of the failed Soviet Union was that its central planners took valuable natural resources and turned them into useless waste. Ignoring issues of quality and desirability, they measured output strictly in tonnage. This was socialism at its worst.

Unfortunately, the USA is following in the footsteps of the Soviet Union. Its central planners are diverting ever larger portions of the nation's income into operations that produce little or no benefit. The litany is extensive, but includes bloated 'Defense' and 'Homeland Security', subsidies for airlines, automakers, banks, construction, insurance, mortgage companies, prisons, and real estate brokers.

Spending by Governments at all levels in the USA is about 40% of total national income. Also, about 50% of the population is dependent primarily on government for its income. This is a country fairly deep into some kind of socialism. Is it getting a good value for its commitment? Does the USA have enviable public education? a low rate of incarceration? free health care for all? a first-rate passenger rail system? The answer to these questions is a resounding "No!"

On top of that, Government in the USA is quite involved with the private sector. Does the USA have a healthy industrial base? a healthy balance of payments with the rest of the world? energy security? well-paid, content workers? No, again.

We are profiling a country at the verge of leaving the club of wealthy, advanced nations, if not heading for outright collapse. The response of the political leadership to the 2007 Depression is very telling: bailouts, handouts, and more pork. This will do nothing to make the nation more productive and increase its citizens' income. On the contrary, it will make the nation less productive and exacerbate the decline in income.