You Saw It Here First

Or maybe you didn't.  The sovereignty movement, the subject of this post, has been around for some time, pretty much since the ink finished drying on the constitution.  It flares up every time there's financial trouble or the federal government gets too uppity for the majority of its citizens.

The last time there was a significant, organized movement anywhere near this large, it led to the civil war.  Tho the liberal wail that 'it cannot happen here', it has happened here, and the results were ruinous.

In the annals of the Bureau, you have seen the argument that the unrest that will almost certainly follow economic dissolution will lead to political dissolution.  In the absence of a strong federal government, many of the issues currently separating the several states may lead to their wish to seek secession.

In particular, the State of Hawaii wishes to secede due to the mishandling of its local indigenous population.  In this case, the urge is more than merely angst at an overweening federal government.  However, it is the overweening federal government that is providing added impetus, allowing non-indigents to align with the indigents and thus increase the strength of the movement.

Of course, a strong federal government would never relinquish Hawaii, because without Hawaii, the US has no Pacific base worth talking about and the loss of the forward naval presence would do palpable damage to the US' self-image as world police.  However, a strong federal government is what we won't have soon.

As the Bureau has stated over and over again, the strength of a government is largely tied up in its currency, as the only power it can get is the power it can buy.  Once it loses the ability to write notes of credit and runs out of shiny things to trade, it loses relevancy, not to mention power.  Then the magic 30% kicks in.

It only takes 30% approval to control a country.  Even tho Obama's approval rating is very high, only around 30% actually support him, pretty much the same number as Bush had in his first term.  Everyone else is just feeling good about not having to worry about Bush.  However, Obama will soon see the same partisan trenchwork in the path of his reforms and will soon see that much of America does not support his agenda.

This brings us to our central discussion, which is that 25 states, a full 50% of the US, are in the process of passing or considering 10th amendment 'Sovereignty Resolutions', two of which border on articles of secession.  We've discussed Hawaii, where the secessionists are gaining power, but New Hampshire is another story entirely.  Pressure has been building in New Hampshire for some time, as the federal government continues to try to force the small state to do things the federal way.  Now, New Hampshire feels backed into a corner and a bill has been introduced that is the first 10th amendment resolution with real teeth, as New Hampshire has provided grievances and determined that failure to address such grievances will be grounds for secession.

The other states are less aggressive, but many states, most vocally Louisiana, are considering rejecting Obama's stimulus package because it increases federal 'cash for enforcement' schemes whereby the federal government uses payments to encourage the passage of laws that it has no right trying to get passed, being as how they are powers delegated to the states.  New Hampshire already declines a lot of this kind of funding.

The Bureau once again wishes to point out that the federal government is effectively broke and is pursuing policies that will inevitably lead to the ruin of the dollar.  The 'dollar overhang' is already large enough to guarantee hyperinflation when the right spark sets it off.  A nation without the means to pay its agents is a nation that cannot accomplish anything.  When the federal reserve note reverts to its inherent value of worthless, the United States of America will no longer be able to pay federal military and police forces, not to mention tax collectors, and the logistics of continuing to manage the 'empire' using FRN bills will be a significant draw in itself.

The Bureau can point to many historical parallels, such as Zaiire, where the army refused to do its job until it got paid in US dollars rather than Zaiires, as the exchange rate was around two million Zaiires to the dollar and rising at the rate of something like 100% per annum.  The government tried to pay in beans and the military dumped the beans on a road, blocking off food to the capitol city, at which point the government had to airlift food, because the army was blocking any attempts to remove the beans from the road.

Of course, you will hear 'it can't happen here', but it has.  Over and over again, it has happened here.  In many states now, and more to come, there is a sense that the federal government is not responsive to the needs of the states and is unnecessarily interfering in the lives of the citizens of said states.  Many of these interferences are actual unfunded mandates that the states must finance, which contributes to the already high deficits in many states.  Were the federal mandates not there, the states may balance their budgets even now in most cases.  Certainly, they would have a freer hand to try to accomplish that goal.

For instance, Texas is a few cuts away from a balanced budget.  The SCHIP requirements will make this situation worse, as did No Child Left Untested.  Were the state to simply abandon the No Child Left Behind provisions and ignore SCHIP, they would likely have a balanced budget, and this is even before eliminating unfunded medicare and medicaid mandates.

Texas itself has always been one day of indigestion away from secession anyway.  Mostly said in jest, the idea of leaving the US is mentioned regularly by residents.  However, there is now a far more serious tone for a lot of reasons that nobody outside Texas will understand.

Texas by itself is completely self-sufficient.  This means Texas has no need of the union.  However, as the rest of the country basically slides into insolvency, Texas will be paying a higher and higher premium to support its federal habit, something the residents do not like.  Simply eliminating the federal dead weight on the average Texan's back would result in around 25% more spending money, and reducing many of the onerous regulations would lead to lower state taxes as well.

Texas has a healthy school system, by and large, the second largest agricultural output in the union, industry, including automobiles, defense, arms, ammunition, transport and energy, as well as control over much of the energy production for the entire US.  Texans have an independent spirit.  Texans are inordinately armed and Texas is a vast territory to try to occupy.  Much of Texas has only a slight concern with the sanctity of governance, so an appeal to that civic duty will go unheeded.

Also, Texas has normalized relations with Mexico, unlike California.  Texas has the ability to absorb labor at a far higher rate than any other state and has the labor capacity south of the border to support it.

This is not to say Texas is ready to secede or that any state is ready to secede, but it is to say that if the federal government collapses, many states will almost certainly secede and the resultant geography will be interesting.  It is the opinion of the Bureau that California will become its own country.  Washington State, Oregon and Idaho will form another country, possibly called Pacific States of America.  Montana, Wyoming, Colorado, Utah, Nevada, Arizona, New Mexico and Oklahoma can join Texas in the Western States.  From the Dakotas down to Kansas and over to Ohio form the Central States.  From Kentucky south to Arkansas, over to Florida and up to North Carolina, possibly including West Virginia, are the Southern States.  It is expected that Virginia, Maryland, Pennsylvania, New York, Rhode Island, Delaware, Massachusetts and New Jersey would remain the United States of America.  That leaves New Hampshire, Vermont and Maine as the Eastern States.

This is, of course, rank speculation, although the Bureau is occasionally right on these wild-ass guesses.  These guesses are based on our 'world view model' which simply assumes people try to do what they think is best for themselves.  For certain, a new nation led by Texas and including the western states listed above, with good relations with Mexico and Canada, would be a powerful industrial country.  It would also be good for the citizens of such states, as they saw their negotiable income increase as their freedoms also increase.

The other pressing issue is the almost clandestine efforts at convening a constitutional convention.  This is very nearly real, as two states are all that are needed to complete the process and convene the convention, which would have plenary power over the entire governance of the United States.  Frankly, the Bureau would rather see dissolution than handing world-improvers a clean slate to rewrite the constitution, as there's nothing really wrong with the constitution, it is just that nobody follows it anymore.  The Bureau is convinced that a new constitution will be just as ignored as the current one.

Inflation(Money) Is Not Inflation(Prices) Redux

So, the fed is madly inflating.  They are engaging in every monetary inflation trick they know.  Why aren't prices going up?  Why haven't loans started flowing?

There are always two sides in any economic analysis, the supply and demand.  Oddly enough, any transaction can be analyzed from any side.  For instance, the sale of pork bellies is traditionally analyzed as a supply of pork bellies and a demand for pork bellies.  However, an argument can be made that there is a supply of purchasers of pork bellies and a demand for purchasers of pork bellies.

So, basically, there is both a supply of credit and a demand for takers of credit.  In this case, both are drying up.  There are few people in the position to borrow money, and most of them are not interested in it.  There are also few banks in an actual position to loan money and few of them are interested in it.

So, the fed wishes to alleviate this problem by pumping money into the economy at a rate never before seen in recorded history.  The increase in money in the economy has so far had little effect on the continued deflation in prices.  The only way to stop deflation is to let it happen.

Basically, people are in debt up to their eyebrows.  For those unemployed, they don't have any room to maneuver and are going to lose everything anyway.  For those employed with increasing costs or employed at reduced pay, they will lose part of what they have.  For those who are on fixed pay with fixed cost, they have no ability to increase their holdings.

The axiom 'all economic activity is at the margin' applies here.  If someone has committed 90% of their income, they only have a 10% cushion.  An 11% increase in prices will wipe that out, leading to the need to reduce other spending, which is, of course, someone else's income.  This is the crux of economic trouble, that spending is in discrete lumps which often must be entirely eliminated because they cannot be reduced.  A good example is cable tv, something most people can actually do without.  In most cases, the price cannot be reduced, so the cost must simply be eliminated.

Another large payment most people make is the mortgage.  As people need money, they will begin, more and more, to consider eliminating what is quite often the largest single payment they have.  This is particularly true if they can move into an apartment for substantially less or if another house, either cheaper or more attractive, is available.  They may be able to finance the other house for substantially less and may get it financed because it is something the banks want off their books as it is a foreclosure.

What can happen next is the family simply defaults on their previous loan.  This puts another house up on the 'market'.  These cascade defaults pose a problem.  The Bureau cannot assess the risk for this, but it most certainly is happening.  However, the risk of these families moving into apartments is also there, as is the risk of them moving into houses investors bought with cash for the purpose of renting, which is effectively the same as the first case in that the old house is now in default and they are living in a house that was foreclosed on.

After this happens enough and enough banks take enough of a drubbing, some investors will step in and buy the loans that are worth something.  Out of the ashes will arise a new, healthier banking system with loans generally only made to people with the means to repay them.  House prices will plummet as well.

However, those in power right now are mostly bankers and are not interested in losing their shirts.  So, they are attempting everything they can to not allow home prices to decrease.  They are also trying to lock people into the homes they are currently paying on, which is why Obama wants to provide 'mortgage assistance'.

Most people also believe that home prices should be protected because they will lose value in dollar terms if the prices go down.  Of course, what they're forgetting is that all prices will go down.  Their house may go down faster, but not so fast that they are completely ruined.  This is the thing I keep trying to emphasize, that everything is related.  When prices go down in one sector, prices in another sector will eventually follow because the price of their production goes down.

How does this happen if the goods in one sector are not active factors in another?  Well, during a recession, there's 'downward wage mobility'.  This means that people often are laid off and forced to take lower-paying jobs.  However, since another sector has gone down in price, they can sometimes afford to.  Also, entry-level pay is lower and the pressure to raise wages is lower because the costs are lower.  As costs go down, wage earners essentially get free wage increases.

Now, price collapses in the housing sector could be a major boon to the rest of the economy as people essentially cut their largest cost in half.  It is precisely this thing the feds are trying to prevent so banks don't lose money.  They are clearly not acting in the best interest of the rest of the economy, protecting moneyed interests at the expense of those upon whose back this economy is borne.  Letting the banks fail would mean everyone pays less for everything and thus finally has more negotiable funds for growth in the rest of the industry.  Propping up the banks and locking people in expensive mortgages means stopping any hope of real recovery in the long term because nobody has any margin and 'everything happens at the margin'.

Fiscal Responsibility

Keynesians insist that we can spend our way out of a recession.  They are half right.  We can spend our way out of a recession, but only if we've saved our way out of a boom.

Arguably, were government properly managed, this is an obvious idea: when the economy appears to be overheating, raise taxes and buy assets such as gold, silver, so on.  This will slow the economy and reduce the risk of over production.  However, it is very important to not spend the money, as that will only recirculate it and not significantly slow the economy.

When the economy slows, the government can reduce taxes and live off its assets, either securing loans against them or selling them outright.  Then, the spending the government is committed to does not have to go down.  Further, this is just good fiscal responsibility, as things the government does that are big-ticket one-time costs, such as building a new road, can be done during a down time with the money that has been saved, thus reducing unemployment making things the country actually needs.  This behavior is not at all inflationary, as the funding comes from previous saving.

Of course, to do this, the country would have to learn to live well within its means and would have to learn to raise taxes during flush times and lower them during lean, the exact opposite of what currently happens.  The easiest way to accomplish this is to enforce that all taxes be of sales/use taxes, which will naturally track economic trends up and down.  The mere act of saving during times of high economic activity will slow down the economy.

However, during a recession, prices decrease, so the government must save significantly more than the current value during the boom in order to cover the bust.  Fortunately, booms generally last longer than busts.

What's Really Going On

Welcome to the zany new world.  The analysts at the Bureau have been pouring over the web, trying to read between the lines as we usually do.  Several interesting things are afoot.

First, of course, is the giant worldwide slow motion collapse that is ongoing, but has become uninteresting.  The end game is fairly apparent, but those who can affect a change seem certain to ignore reality as long as possible, quite possibly because they have a vested interest.  Since you can now hit up any regular news source for plenty of (dis)information on this subject, and the Bureau has released post after post on that subject, which should provide plenty of (dis)information from the Bureau's perspective, we'll just ignore that 800 pound elephant in the room and look at what awaits in the wings.

Of course, the Bureau continues to monitor China, as the global economy is pretty much riding on China's back.  China is in a strange situation where their country's wealth on a global stage is tied up in US paper.  This gives them amazing leverage of the kind that a madman has in an elevator with a grenade.

If China starts to liquidate its Dollar-denominated paper, it will trigger a collapse of those assets, which will reduce the sovereign wealth of the country.  The question, of course, is whether they care.  The United States certainly cares, as it is that wealth that currently staves off the devaluation of the Dollar on a global stage.

If China stops buying US paper, it will no longer be able to export anything to the United States.  The objective of a Communist state differs from that of a Mercantilist state such as ours has become.  A Communist state putatively exists to provide the workers with a better life, something the Chinese Communist state has done more than lip service to.  Therefore, the longer the Chinese can keep US Dollars flowing in as an excuse for continued employment, the better it is from a Chinese viewpoint.  This is why they are buying our paper.

Further, China now finds itself more and more in a position of global influence.  They have a lever with which to move the world as we know it.  The United States no longer commands the control of this planet.  It still boasts the largest and most effective military, but it cannot take on China in any war near the Chinese homeland.  It also cannot see to the one thing the US Navy has a right to be doing, which is deterring piracy on the high seas.

What this means is that most of the world, including Russia, are now required to pay begrudging respect to Chinese diplomats and China now obtains the kind of respect they have come to expect in their culture for their ancient society.  It also means China is now more civic-minded, having deployed warships to deal with piracy in a way the US hasn't.

So, to summarize: China has control of the US by having control of the majority of US paper.  China is now using its navy with some effect in a global stage fighting piracy, something the first-rate navies seem unwilling or unable to effectively address.

Now, for the bad.  China lacks enough jobs to be fully-employed and has too many people to remain agrarian.  This poses a serious problem.  However, the meteoric rise of China has not come to an end; they now are in possession of a large manufacturing base, paid for by the United States and Europe, and are capable of turning that to their gain.  Thanks to industrious effort, they have taken the leg up the rest of the world offered them and proceeded to climb further in their own direction.  Everything the world has asked them to make they have reverse-engineered and created clones more useful to them.

The Bureau still believes China wants nothing more than to be considered a 'peer of the world' rather than a third-world nation, and has no militaristic intentions.  However, many continue to misinterpret China's anti-piracy efforts as China attempting to establish blue-water naval capacity.  It is possible China may achieve true blue-water naval power, but in the day of the nuclear arsenal, it means little to any first-world military, a class China finds itself in more and more often these days.  What the Bureau must stress is that China has taken every precaution to ensure that these cruises are co-operative with the rest of the world, particularly India, England and the US.

That's it for the China desk.  Now, off to another part of the world, Russia.  The Bureau feels that the Bear is waning.  Russia's short time in the limelight was due entirely to a booming energy market.  The serious bust in the energy market has hurt Russia's bottom line, and, since their governance process and society at large is simply riddled with corruption, it can stand little reduction in the inflow of cash.  It is expected that Russia will turn inward for the near future and there will be less and less problems with satellite states.

The next area of concern is the EU.  The Bureau is primarily concerned with major players and those players that speak English because the Bureau is quite lazy.  However, noises coming out of EU are very interesting, indeed.  The Euro is in trouble, as the ad hoc alliance it really represents is coming apart.  Germany does not feel it should pay to bail out Italy, for instance, and Italy wishes to inflate to fix its financial problems, something that would hurt Germany.  As the tension grows, the EU will be under heavier and heavier fire.

England, the only country that has really implemented most of the EU directives, is watching its economy plaster under the weight of those directives, and is beginning to awake to the suffocation.  The libertarian movement in England may gain steam as a result, and it is becoming more clear that England may secede from the EU, something it certainly can do as the EU has no standing military, and the only power strong enough to do anything about it, France, is allied with England in NATO.

We're not looking at Armageddon or WWIII, we're looking at a slow, grinding dissolution of a more and more ineffectual system, as Europe deteriorates faster than the United States from the contagion released on these shores.

Well, I lied; we will discuss the current economic disaster, but only to point out that the worst of the economic problems are clearly happening elsewhere.  The United States managed to sell tons of toxic paper to the rest of the world and they are now suffering the losses for having bought the paper.  Literally, the damage to the rest of the world has been greater than the damage to the United States.  Such is the benefit of having the reserve currency.

This brings us to the last topic on tonight's agenda, the sociological ramifications of recent events.  One thing the Bureau has considered at length over time as part of the futurological model we subscribe to, is the fact that the United States got more than its fair share of charlatans.  They came here in droves to find a new place to work.  They have so far managed to stay ahead of most of the rest of the world in dirty tricks.  They managed to sink Japan with the cost of the great real estate collapse in the 80s and now they are shafting the rest of the world right now.

However, it is becoming apparent that the backbone of the country, those professionals that produce the high income and therefore high taxes, as well as provide the services and management expertise that has made the US one of the best run countries in the world, those same professionals are talking of leaving.  They were talking of leaving when Bush was elected, and some did move to Canada.  However, now it is no longer ideological; it is an active concern for the future.  There are a lot of potential issues to consider, but the biggest winner in this change is likely to be, of all places, New Zealand.  Hopefully the target countries will savor the opportunity to receive the new refugees from the dissolution of the Great Republic, and for certain, were the Bureau to relocate, the updates would continue about as often as they have so far.

Once again, there is a heaviness in the air.  One is tempted to end with the old adage 'last one out, turn out the lights', but it is likely that the power will be off anyway.

Ain't Gonna Work No How

Everyone is wading in on the economy these days.  Over and over we're told that the current stimulus package is too small to be of any use, which is pretty much true.  However, there isn't any way it's going to work no matter how large it is.  I'll address the arguments as follows:

1) "It worked for FDR, it can work now!"

In a word, no.  It didn't work for FDR.  Sure, GDP went up, but real production stayed about the same.  In other words, in our hypothetical 100 man economy, we went from 80 men employed to 90 men employed, but we didn't see any increase in actual production, because the things built were commonly not things people wanted.  In other words, the government didn't put people to work growing food; they put people to work doing make-work infrastructure projects of doubtful utility.  In a world where nobody can afford to operate a car, the availability of nice, clean and majestic roads is of little utility.  This means that the new 90 man workforce was trying to buy the same stuff from the other 80 men, leading to price inflation.

But, didn't the extra people working buy things in the economy and thus employ more people?  Sure, they did.  This prevented deflation in prices, which would have led to reduced costs and thus available funds to increase consumption and production.  Let me repeat that: primarily, the stimulus stops the adjustment in prices that would 'mark to market' or price more correctly those things used in production as well as final goods, meaning that many inefficiencies still exist and the actual recovery takes much longer because there is less free cash for investment.

2) "We need the infrastructure, anyway!"

Sure we do.  One of the few things that statists argue the government needs to be doing is infrastructure, roads, electricity, so on.  All arguments as to whether that is better done privately aside, this is actually a mildly good argument.  The problem is, of course, that 'infrastructure' is less than 30% of the 'stimulus' because, frankly, it is bad stimulus because it takes so long to get going.  We can't just 'build a bridge'.  First we have to employ an architect and some civil engineers to design the thing, which can take 18 months.  Before that happens, we have to make all kinds of surveys and plans to know where to put the thing.  We have to hire geologists and other kinds of professionals to make sure it won't sink.  And then we hire a few men to build it.  A modern bridge simply does not employ a lot of people in a hurry.

Some things we could do immediately.  These include painting, inspection, pothole filling, trash pickup, road widening, so on.  The problem is that almost all these projects require competent manpower, which we're short on.  The work would have to either be completed at overtime by workers currently on payroll, which doesn't help much, or be done by new people, which is a recipe for disaster.  As exhibit A, I give you the TSA workers who paw your person and property in airports.

As I have said over and over again (not necessarily on this blog) the best possible stimulus is a direct payment to every citizen in the US.  Limit it to those who filed tax returns last year or simply blast it at the census roll, but whatever way you do it, do it immediately.  A large cash payment would go towards spending in most cases, paying debt in most of what's left, and savings in a small percentage.  A large enough check will even lead to home improvement.

3) "So, let's do that, it seems like a good idea..."

Ah, less excitement, but we're now thinking a bit.  However, let's get on with the analysis of the problem.  In the 30s, when the US crashed, it did so largely due to the collapse of the export business.  These days we don't have an export business.  Were everyone given a pile of money, most of what they bought would not originate in the US.  That means that our stimulus will mostly help China et. al., not the beleaguered worker in America.  The reason for this is pretty simple: they have the capacity and we have the money.  That has been true for so long that changing it would require a sea-change of the exact same sort we're trying to prevent with this stimulus.  So, as before, the cheapest place to get things would be elsewhere because they're hurting as bad or worse than we are and thus will underbid us.

4) "Um, ok, so we make a law that stimulus can't be spent on things made overseas..."

Now you're thinking again, but not far enough.  This is protectionism in all its ugliness.  Whenever a nation goes down this road, it invariably hurts its prospects.  Let me explain.

There are two common types of protectionism: the embargo/tariff and the subsidy.  People don't think of subsidies as protectionist, but they are.  I'll deal with them separately, but first there is one consideration that is common to both.  Simply put, the protectionism becomes an expected benefit.  Every time you break down and help a given sector, that sector comes to expect the help, so you will be helping it again and again.  Another common problem with protectionism is the specter of a trade war.

First, the embargo/tariff.  Essentially, they are the same thing, as the embargo simply sets the price at whatever a smuggler wishes you to pay while a tariff increases the price by a certain fixed amount.  This kind of tariff primarily hurts your own consumers and producers.  If the thing being protected against is a factor of production, all the things produced from it cost more, meaning everyone in the economy now has to pay more so that a few can afford inefficient production and unwarranted wages.  As I have discussed before, falling prices help everyone, but prices being held up inevitably only help a small part of the economy.

Second, the subsidy.  Essentially, you take money from the economy at large and pay it to politically important industries.  In some cases, such as Airbus, the number is as high as 30%.  The French government prints a 30% rebate on every plane sold.  This means that whatever that amount is is being added to everything else they sell.  Let me explain.

In our hypothetical economy, we produce widgets and wangos.  We subsidize widgets by 10% and sell wangos on the open market for whatever the market will bear.  If we sell ten widgets at $10 each, we make $100, and pay $110 to the producers of widgets.  Then we tax for $10 off of the sales of wangos.  Suppose we sell 100 wangos at $1 each, for $100.  Then, we tax the wango sales at 10% for $10, meaning wango producers get $90 or 90 cents a wango which is transferred to widgets.  In order to remain wage competitive, you guessed it, the producers of wangos raise prices to $1.11 per wango because the 10% tax makes it 11 cents per wango if the price is only $1.10.  That 11 cents initially appears to increase government income because the same number of wangos move initially.  However, it does not last.

Now, a foreign concern is faced with the opportunity to purchase a widget from us at $10 when it costs us $11 to produce and to purchase a wango from us for $1.11 when it costs us $1.00 to produce a wango.  Here the central problem arises.  The foreigners will simply find another place to buy wangos, preferably somewhere they aren't taxing them.  At the same time, they will buy widgets.  This means the cost of the subsidy goes up at the same time that the taxes go down.  However, since the expectation of the 10% subsidy still exists on widgets, the producers argue, successfully, that they can't continue to sell as many and thus employ as many people if they don't get the subsidy.  Since this is now a large political lobby group, it is difficult to reduce the subsidy.  At the same time, the internal production of wangos is literally drying up because, in this modern world, it has become cheaper to buy wangos abroad than purchase them locally.

So, for instance, we sell 15 widgets at $10 each and pay $165 to the widget producers, then go looking for the $15 in tax money from only 50 wango sales, which is now a 23% tax, meaning each wango now costs $1.30 on the open market, or wango producers are making less money.  As you can see, this is actually a feedback loop, as the more and more the system distorts, the worse things get.  This commonly happens in any redistributive attempt, as it will create a new price curve and preference function that always, always, always favors the cheaper product, all other things being equal.  So, subsidized health care ends up with a high percentage of people getting their kids checked for the sniffles and thus the government having to cut funding for other, more important things, because there simply is no cost comparison and thus the majority wins.

As an aside, this is one of the more insidious problems with the VAT.  Chinese companies pay no tax on their factors of production but, say, British companies do.  That means that each interim production has a tax on it and is thus more expensive than its Chinese counterpart.  In the end, the VAT will drive the local industry to adopt a model that does the most possible production overseas, thus driving jobs out.

So, to summarize: any useful stimulus will take too long and won't necessarily increase jobs or won't necessarily produce useful output.  Any attempt to increase jobs is essentially an attempt to drive production and will end up driving production at the lowest cost competitor available, which is not the USA.  Any attempt to stop that will provide ruination for other parts of industry that may be on the track to recovery.

So, what is a country to do?  First, let the banks fail.  I cannot stress this enough.  If the banks do not fail, they will continue to be a valueless parasite with highly-paid dolts at their helms.  If they are allowed to fail, we will end up with leaner, meaner banks with great hunger in their bellies who know the feeling of impending doom, which means they will manage our money a lot better.

Second, let the industries that need to fail, fail.  Goodbye Chrysler.  Maybe, goodbye GM.  Possibly even Ford.  These industries are locked in titanic struggles with their very own production systems, and the failure of just one will free up resources to keep the other two alive.  It will also provide a lesson to the labor unions that fighting for wages over twice what the Japanese make is a good way to go out of business.  Out of the ashes of these dead industries will come new industries that are streamlined and ready to produce economically.

Third, reduce restrictions on business, certainly those considered 'small', those employing, say, 100 people or less.  These are the engines of your economic revival.  The recovery does not start with GE.  It starts with Joe the Plumber who decides to hire a young man who is down on his luck for a few dollars an hour to do scut work like heavy lifting.  Then the young man has money to spend and Joe gets more work done.  More importantly, the young man now has a career path.

Fourth, eliminate the minimum wage.  I know that the morons running the monkey house insist that we need to do the opposite.  However, an absolutely certain way to grapple families into public assistance is to remove their ability to produce any sort of income.  A family would rather have some sort of income than no income, and the minimum wage often prevents that.  Certainly, younger, less experienced workers are priced right out of the market.

Fifth, eliminate the income tax.  Just do it.  Both corporate and personal.  Cut government spending drastically.  Don't worry, the failure of the banks will get blamed for the catastrophic depression such an action would trigger.  However, within a few short years, recovery will begin to happen, as the average person who is still employed will see a 20% pay raise immediately.  Further, the average person would be able to take around a 17% pay cut and still stay even on income.  This means that the person can make his payments and feed his kids on less money.  Further, the people thrown out of government jobs (don't throw them out all at once, of course) would find jobs somewhere, as there is a demand for jobs as well as a supply.  When they find a job, they add to the real economy by producing something someone actually wants.  You'll see a serious increase in the actual economic base which will lead to real GDP growth.

And finally, and most importantly, support all civil liberties, the right to keep and bear arms (reduces the cost of security, meaning more money for other things, not to mention employs manufacturers of arms and ammunition), protect the right to property by enacting legislation prohibiting the doctrine that allows drug warriors to accuse property of a crime, which is in direct violation of the 4th amendment (increases people's confidence in their property), stop the drug war because it violates the right of a person to his own person, as well as the right to pursue happiness (also, will reduce crime and thus police costs) and, finally, protect financial freedom by removing restrictions on cash flow, prepaid cards, or any new payment method.  This is 'free money' as opposed to 'hard money' or 'fiat money', the idea that money is something the market can generate without any regulation, and the de facto nature of money for a very long time prior to the invention of government regulated money, which has, mostly, been used to finance war.  Go back to only accepting gold and silver in payment of debts due the federal government and only pay out gold and silver in payment for services rendered.  This will force the government to become fiscally responsible or go broke in a few years and will protect the value of money in the hands of the average guy.  It will also allow new, more efficient forms of money to arise which will reduce 'transaction costs' and thus increase the velocity of money and therefore the GDP.

I'm fond of saying that everything political or financial eventually boils back to economics and that any 'accounting irregularity', be it any redistributionist policy such as the progressive tax or welfare, or direct violations such as fraud and theft, lead to loss in the economy as a whole.  Systematic accounting irregularities lead to systemic loss and we all get poorer as a cherished few get richer.  I guess we have to ask ourselves if we really want to create a society where there are a few very rich and the rest of us barely making it, because that is the eventual result of every single experiment into socialism of any sort, even social democracy.  The siren call is loud to the bourgeois guilt and certainly appeals to the downtrodden poor, but in the end, remember this maxim as if burned on your souls as you are out of work, starving and have lots of time on your hands: 'Communism can work until the food runs out.'

Do Not Be Concerned About Deflation

I say not to be concerned about deflation for two reasons.  One, deflation isn't the bear in the closet it is perceived to be.  Two, deflation will not be the order of the day for long.

First, let's address deflation and what happens during deflation.  First, deflation eventually drives all prices down.  This is because there is less money chasing goods, meaning that the price of goods must decrease as the value of money relative to goods goes up.  Easily, one can see a few positive things about deflation.  One, the decrease in prices has led to an increase in spending, quixotically.  What has happened is that margins, and therefore profits, have decreased, as they must, which harms the rich.  The average person remains unaffected by the travails of the stock market.

There's a misconception about the demand for jobs.  It is assumed that jobs are created through industrial activity and that is the whole of it, when in reality, there is a demand for jobs as much as a supply.  As a recession wears on, workers must accept lower pay due to a reduced supply of jobs, but the demand is still there for jobs, allowing, at a reduced cost, many activities that were formerly marginal.  As the write-offs continue and money starts flowing again, the mal-deployed funds get deployed to accomplish more useful things for less money, reducing the cost to the entire system, which reduces prices, which leads to, quixotically, prosperity, because prices can and often do fall faster than wages in a recession.

Now, on to our second point, which is that this deflation cannot long endure.  Part of the argument is that the government's attempts to inflate their way out of the deflation will not entirely fail.  At some point, the Obama administration's infrastructure spending will start to provide a trickle of growth, and that will be all the inflation needs.  If the fed does not act decisively to stop inflation at the very first sign, and the fed has never acted decisively to stop anything at the very first sign, then the current cash overhang will explode.

This deflation was caused by a massive overhang in imaginary money in the form of derivitives, most of which have simply gone away thanks to the collapse of the mortgage industry, where most of the toxic instruments lay.  The mechanics have been hashed and rehashed, but suffice it to say that massive amounts of monetized assets have been removed from the system, which has reduced the cash pool significantly, leading to mild deflation.  Why mild?  Because the fed did everything in its power to stop the failure of these institutions, even to the point of assuming some of these toxic instruments.  At the same time, the fed and the treasury department have been stuffing cash into the economy with both hands.  So far, this cash has resulted in little change in the economy because the consumer lacks the ability to assume any more debt and bankers lack the will to risk greater amounts of money at this point on weak credit.

However, in about two years, most consumers will be in better shape, assuming the whole system does not implode, and most bankers will be looking at making better profits rather than merely surviving, so the credit situation will change.  At the moment, there is plenty of cash in the system to enable lending.  By that time, with continued efforts at essentially zero interbank rate, coupled with ongoing infusions of cash into the banking system, the banking system will be flush with reserves, leading to an ability to lend using fractional reserve banking.  As the infrastructure Obama wishes to build will really start employing people right about then, given that engineers must design and contractors must bid and beaurocrats must approve, we can expect a spark of apparent recovery right about then.

Since the government-employed people will not necessarily be adding value to the system but will be given tokens just the same, they will bid up the prices against the rest of us producing the factors that they need.  Since by that time a significant amount of the economy will be under control of the government, doing politically effective things rather than economically effective things, we can expect a continued decline in real production against an increase in demand through fiat money.  Add in a generous dollop of lending and the dollar will simply collapse.

The seeds of this destruction are being sowed now.  The continued inflation of the currency in an effort to save the banks is the foundation for the next bubble.  The bankers currently running the system could not see the inevitable collapse that was obvious to any student of economics five years ago, so they will not now see the potential for runaway inflation.  The end will be short and horrific.