The collapse in the financial markets, and recession we’re now in and probably will be in until 2014 (despite ups and downs along the way), should have occurred back in 1987, but Greenspan inflated our way out of it … creating a more serious problem because we tacked on 20 more years of debt!

A recession is here for sure. How do we get out of it? A usual way was by lowering interest rates. But who wants to loan? And who will have a job that they can borrow? And what industry will have demand that requires investment?

Another choice is Keynesian fiscal stimulus — projects to employ people nationwide. But guess what? How can regular jobs be restored? We destroyed the foundational jobs that could have protected us by outsourcing and free trade agreements that shut them down. Manufacturing has been outsourced. Services have been outsourced. So what jobs will be stimulated? Bartending, coffeeshops, hairdressing and the like? If the travel industry goes, so does the hotel, restaurant and entertainment industries. This is just an example that should give you pause to think. Who are you going to stimulate now that the backbone has been gutted?

The economy that has been built up over the last 20 years has been debt based — meaning that demand for goods was geared towards niceties rather than necessary consumptives. You don’t NEED a jacuzzi but with a home equity loan you can install one. We didn’t NEED most of what we bought, but because debt was cheap and we were encouraged to buy, we bought and built up entire industries geared towards luxury rather than necessity. This will not return to the extent it once was. In fact, we now need to build up an entirely new economy from scratch.

Not to mention we have a burgeoning illegal immigrant problem — people looking for work who also require a tremendous amount of social services spending (that we will have to pay for out of taxes). This will turn ugly because of the many times I’ve seen this previously, it has never failed to turn ugly (witness Germany in the eighties) when the economy turned bad.

Our manufacturing sector is gone, and jobs have been outsourced. There are no jobs to stimulate along these lines. The decision to make the financial services industry a key backbone (20+%) of the economy … and other “service” industries, is now seen not to have been wise.

Those in power listened to those with money who told them to “let us make more”, and the result is now disaster. As I discussed with the quotes from Mencius and the Grand Historian, those in power erred. Every time we create a new free trade agreement, with a country like Columbia for instance, is because large multinationals want to get into that market to sell more goods and make a few more million dollars. Let me tell you, the large multinational have wonderful ways of shielding taxes on their extra profits with offshore corporations and so forth. This is not the key to prosperity for the nation. The financial return to the US economy is not what politicians are led to believe it will be unless they reform THESE tax laws. If I told you the offshore tricks that oil companies used to keep profits out of the US you’d have a heart attack. But the people in power listen to these big boys (because they are granted access since they are big) and kid themselves thinking “this is good for our consumers because imported goods will be cheaper.” But as I’ve been saying, cheap goods are fine as long as the people are employed. They never take that into account. I’ve said over and over again, the economic models don’t take into account (1) the TYPE or MAKEUP of products within GNP and (2) the fact that lower prices for consumers should take a secondary concern to employment below certain levels. We are now in defaltion so we shall see who is right.

For every large multinational who therefore sells more, we also put hundreds of little businesses out of work in our home country because of the flow in of cheaper goods. Politicians never consider this because the little guys rarely raise their voices in unison, and PACs hold the purse strings. The PACs should be outlawed, period, and then everyone has a level playing field otherwise the encroachment into Washington of money destroys the government of the people. The little people are the guys paying the taxes! But unfortunately, because they are scattered everywhere and don’t have one big voice that can knock on the doors of Washington, these are the guys who get ignored whereas the doors are open to a Boeing, IBM, Goldman Sachs, Conagra, etc.

Here’s the only thing that will work AFTER this all works itself out, which   will by the end of 2014. Yes, there will be lots of ups and downs between then — we’re do for a stock rally and reprieve right soon for instance, and 2009 after April should be mostly up and the same for 2010 until the end of the year. But the big thing is that this cycle has happened multiple times in the past and is always caused by too much debt and too little regulation on debt. So it should have been no surprise to anyone at the time because it certainly wasn’t to an ordinary fellow like me and others who read history. They were all just seduced by the financial services industry which wanted to keep raking in the money.

So what will work? After all the destruction, you need ENTIRELY NEW INDUSTRIES, not the old ones, to come up. You need new technologies, such as things the government has held back in black work projects. You need Schumpter creative destruction. You need the Kondratieff new paradigm. Whether it’s nanotech, or magnetic power, or whatever, you need something so transformative that investment comes out of hiding and people invest  and the world is rebuilt anew. That’s the ONLY thing that will work. So R&D, government release of black ops projects, university research, Bell Labs types initiatives, national Apollo mission type objectives that give birth to entirely new industries — that’s what we must put our energies into. Grand missions! To believe that debt relief will bring things back after we’ve outsourced entire industries and their jobs overseas is ludicrous. How will those jobs come back if they are still cheaper over there? They won’t! You only have one choice. To create something entirely NEW that is an industry built at home with employment at home, and it’s not outsourced. That’s it, that’s all that ever works. If you study the Kondratieff waves, this becomes clear.

I’ll say it again so that it sinks in. You can do all the monetary policy and financial stimulus you want, but much of the service industry economy that has built up over the last 20 years is doomed because it was an unnecessary luxury that only thrived in good times, and much of the consumption (demand for the industry producets and services) was based on debt. You only have one choice — to build up hard core, basic industry once again through new policies that make it cost competitive. Sorry GM but you had 20 years to get it right again and still could not, and your unions get paid 95% of their salaries when laid off — do you think you can compete or stay afloat like that?

A strong basic economy usually takes the form of agriculture and manufacturing. Agricultural policy should favor the small farmer rather than the large behemoths, who are making large strategic errors as well that threaten national security.  In this way jobs are spread around, the food supply is not at risk, communities stay together, and small businessmen make a living. This is much more important than concentrating millions in the hands of a few big players who can avoid taxes, manipulate politicians, and make big decisions that imperil the nation.

Manufacturing policy should encourage small firms with legal exemptions from restrictions or oppresions that send manufacturing elsewhere. Most of all, we should release any R&D that has been in the labs. If the government wanted to do anything, it should spend its monies on these new initiatives that can power the next wave up. Who knows what that technology, or market breakthrough will be?

Related posts:

1. Recession or Depression? It’s Here, It’s Started