GOP Brings a Water Pistol to Machine Gun Battle

It’s like going into war carrying only a water gun!
Well-meaning Tea Party members of Congress unfortunately don’t have anywhere near the political firepower needed to address successfully the harsh realities facing our shattered economy and morally bankrupt political system.
I’ve watched politics very closely (mostly from the inside) for decades. I love the idea that the GOP is going to read the Constitution on the floor of the House of Representatives. And who can be against Congress cutting its own overhead by a whopping 5%? Or that going forward, the House of Representatives promises to hold actual hearings before passing major legislation?
I say, bravo!
Even President Obama has offered lip service to fiscal responsibility. To preempt any talk of reducing the federal work force back to 2008 levels, he’s hinted he might sign off on freezing federal employees’ automatic raises for a couple of years.
Sure, good ideas. And on a certain level, relieving – until you take a hard look at the magnitude of the federal deficit (which will be well over $1 trillion again in 2011) and the damage to the economy that needs to be undone before a recovery can even begin.
No Real Tax Cuts, Despite Silly Bipartisan Propaganda
There is a tone of triumphalism among Wall Street cheerleaders (especially on CNBC) that President Obama has “become a Reagan/Bush supply sider” by embracing the Bush tax cuts.
In reality, what is being touted as a major tax-cut victory is simply a postponement of a massive tax increase for another 24 months. Reminder: The Bush-era tax rates are not a panacea – they were in full effect in 2008, and the economy still went off the rails (and hasn’t gotten back on track since, as the ranks of the permanently unemployed can attest).
The real problem is that exponentially expanding regulation and government spending continue to cannibalize the private sector. Moreover, by creating 43-cents in brand new debt for every dollar expended, the federal government is warping capital markets and putting tremendous pressure on the Federal Reserve to monetize (inflate away) unmanageable levels of debt. There is nothing on the horizon to change that.
And with the incoming GOP leadership signaling it will sign off on raising the national debt limit (already at $14.3 trillion), the long-term liabilities borne by taxpayers will rise dramatically. Instead of marginal tax rates rising, the “inflation tax” exacted on holders of depreciating dollars will rise as the Fed monetizes Washington’s debt-spending. This dangerous imbalance will continue to grow until a currency crisis forces Congress’ hand. And not before.
Rapid Government Growth Fueled by Debt-Based Deception
The growing government debt bubble is key to understanding the high probability of a currency crisis. Even as the private economy has contracted by a whopping $1.3 trillion since 2007, the public sector has expanded by $1 trillion – not through rising revenues, but artificially, through debt and currency creation.
The question for markets will ultimately become: How long can Uncle Sam get credit and print money before this deception falls apart?
Enter an Era of Permanent Structural Unemployment
Unemployment Line
A persuasive analysis by CFA Daniel Amerman of the government’s own self-serving employment numbers reveals that if artificially engineered boosts in government jobs were backed out, we arguably have a true unemployment rate of about 26% – just one point from the worst of the Great Depression in 1933. Amerman shows how the government’s Bureau of Labor Statistics has concealed these depressionary unemployment levels by creating three broad classifications which in turn break down into six distinct categories (U-1 through U-6).
Defenders of our sick, politically dominated economy keep repeating the 10% headline unemployment number – also known as U-3. Unfortunately, this statistic excludes millions of jobless Americans who are deemed to be “discouraged” from actively seeking work. U-3 also fails to account for many who have fallen off hugely expanded unemployment benefits (now 99 months out and growing) and for skilled workers holding down part-time, low-wage jobs.
The U-6 unemployment figure includes short-term discouraged workers and others who are left out of U-3. It is currently running at 17%. This is the government’s own number (which I’d argue is still incomplete), yet it goes virtually unreported in the mainstream media in favor of the “official” unemployment rate, U-3.
But Amerman takes it a step further. Because federal deficit spending amounts to another 9% of the overall U.S. economy, he argues that if it weren’t for the Federal Reserve’s printing of money to buy government bonds, unemployment would currently be the 17% plus at least another 9% – or 26% in total!
Bottom line – a more accurate examination of statistics suggests we are staring straight into the maw of depression-level unemployment.
Regulatory Stranglehold on the Economy Tightens
In 2008, a credible analysis in the Wall Street Journal by economists Nicole and Mark Crain suggested that then-existing levels of regulation were consuming a whopping 14% of Gross Domestic Product. But those numbers, while compelling, still understate the magnitude of regulatory overreach, especially when you factor in “green” lawsuits which have further inhibited the modernization of energy infrastructure and the launch of new industries which cannot be born (or reinvent themselves) in the current environment.
Consider these new thumb-in-the-eye regulatory initiatives by the Obama Administration:
  • The Obama EPA has nationalized the permitting process for all new energy-related construction projects. This major power grab was objected to by only 14 states. Despite the GOP coming to power, all of them have backed down except for Texas, notes the December 30 edition of
  • In another regulatory jihad, the Department of Health and Human Services under Secretary Kathleen Sebelius in December issued a 136-page federal decree essentially nationalizing the process of setting insurance premiums (historically a state-level decision).
  • On December 23, the Interior Department issued Secretarial Order 3310 giving itself more power to end energy development on all public lands.
  • Then we have the re-introduction of government end-of-life healthcare rationing (i.e., the death panels that were supposedly dropped from Obamacare to help get it through Congress). The author of Obamacare’s infamous Section 1233, Rep. Earl Blumenauer (D-OR), cheered on the bureaucratic reinstatement of death panels by sending out an email stating that “the longer this regulation goes unnoticed, the better our chances of keeping it.”
Beating back any one of these regulatory assaults would be an almost impossible task for a freedom-minded House majority acting alone. Much as I like some of the post-election rhetoric being bandied about by the incoming GOP majority (and even the Obama Administration), I see a continuation of business as usual: Lots of pointless drama between personalities – mostly over cosmetic and symbolic issues.
This is a time to keep your eye on the ball. A major crisis in paper assets, led by the dollar, remains in our future.
But don’t fret. Far from being the end of the world (for those who are prepared, at least), we NEED a currency crisis to rescue us from a political system that is far too dysfunctional to fix itself.
Independent Living‘s investment outlook for 2011 and beyond reflects these hard political and economic realities.