The decision by the Federal Reserve on Sept. 18 to lower Fed Funds and Discount Rate by .5% was the last straw in terms of holding in my personal frustration regarding the state of things in the US. Their mandate to contain inflation, which has been quietly put aside now for years (i.e., the government printing presses have been working overtime to increase the money supply, now increasing by roughly 15% annually), is now out in the open.
Of course the fact that the US dollar purchasing power is down by about 97% since the Federal Reserve came into existence tells you all you need to know about the effectiveness of this institution. The continuing, and now accelerating, trashing of our currency is more than a disgrace—we may very well be on the way to a major currency revaluation (think Argentina) and a major breakdown of the economic system. How is the housing market helped when mortgage rates, closely related to long bond rates, climb? And why shouldn’t they rise? Is any knowledgeable financial entity going to accept the current negative real rates (actual rate minus the inflation rate) on their investment in treasury bonds?

What the Fed needed to do was to raise the Fed Funds Rate in light of rapidly increasing commodity prices, especially on food and fuel. In a recent study of 80 commodity prices, the year over year average change has run near 90 percent. That is staggering—but since the Fed says there is little in the way of inflation to worry about we can all sleep better. NOT! The only conclusion I can draw is that they are either stupid (not likely), lying to us (likely), or figure that we can’t handle the truth (also likely). Instead they chose to bail out the bank cartel, under the cover of helping the distressed homeowner and real estate industry and mitigating the possible consequences of the credit crisis, while hoping that the bad consequences of their move could be contained.

The currency, commodity, and bond markets are already rendering their verdict on this. I believe that before this chapter of history is closed, the Federal Reserve decision will be deemed one of the worst in its mixed history. I expect that the history of this present period will knock Greenspan from his current rock star status to the Fed Chairman that laid the groundwork for economic calamity of the early 2000s period.

The generation in schools today will not likely have anything resembling the older generation’s quality of life going forward. Every citizen should read the reports posted at http://mwhodges.home.att.net/ You will not view the state of affairs in the same way after reviewing the material contained therein. The list of significant national ills is a long one, so I describe a relatively few, then I propose some revolutionary solutions.

1. There is no real recognition, let alone a policy, regarding energy needs for the future. Clearly, society as a whole is in denial about how much longer ‘energy use as usual’ can continue. The ethanol ramp up, an obvious mistake discredited by almost everyone who has analyzed it, illustrates how our national political system is defective. At any moment gas lines, and worse, can occur. The trigger will likely be our attack on Iran, probably coming in early to middle 2008.
2. The infrastructure is rapidly deteriorating. Billions need to be spent and soon.
3. Our national elected office holders are a disgrace. They mainly work to get re-elected, so they cannot be counted on to advocate difficult remedies to maintain or improve the long term national quality of life. Congress is filled mostly with bodies which take up space, send useless propaganda mailings back to their constituents, and appear in the media posturing on the issue du jour with solutions that unrealistically require no sacrifice, work on fundraising for the next election, and meet with lobbyists on how to pay them back for the past and future contributions. Add to the Congressional mix a few out and out crooks, liars, and egotists and you pretty much sum up our legislative body. The amount of useless expenditures on pet projects is legendary and well documented. I should add that the Office of the President is no better.
4. Another disgrace is the Federal Tax Code and the IRS that enforces it. I do not need to say more on this—it is too obvious.
5. Our leaders in government, finance, and business talk about the ‘free enterprise system’. However, market manipulation, special subsidies, tariffs and bailouts undermine this concept. On the first point it is very likely that the Fed, Treasury, and/or surrogates (think Goldman Sachs) take newly created money and ‘buy the (stock) market’ when the stock averages look like they are about to fall significantly. It will take too much space to justify this, but a read at www.gata.org will be an eye opening to those of you who have not immersed yourself in financial matters.
6. The fiscal irresponsibility of the Congress, the President, AND the people is enormous. Personal and government debt loads are large and growing. Savings in aggregate are close to zero (it was near 10 percent around 1980 and has been decreasing ever since). The overuse of credit is clearly having consequences, and there is much more to come. And the national debt issues have perhaps much larger consequences—they affect our foreign policy. Do you think the US can alter what the Chinese might do (militarily or otherwise) when they can sink our financial system by dumping on the market all the Treasury debt of ours?

OK, so what could be done to solve these enormous problems and issues? First, there needs to be recognition that ‘we the people’ need protection from ourselves so that greed and fear, the biggest drivers of behavior, are contained. Second, some of the most far reaching solutions require constitutional changes, so I am under no allusion that anyone in power will agree to them anytime soon. But, as a thought process think about the following.
National leadership needs to be vastly improved. How?

1. Term limits for Congress are needed, requiring an amendment to the Constitution. The Founding Fathers probably did not foresee that career politicians, instead of citizen politicians, would evolve.
2. Take all the need for fund raising and influence peddling out of the system, as much as possible. Presidential and congressional campaigns should only be funded from federal grants, with an equal amount to all candidates for a particular office. All contributions and use of personal money should be prohibited.
3. All campaign ads on radio and television must have only the candidate speaking and equal amounts of time for all sides should be mandated. The amount of negative campaign ads would drop substantially if candidate A has to appear, not just someone narrating, to talk down candidate B. And non-information, but currently effective image-making commercials for candidates would be gone.
4. The President should have the line item veto, this time for good. This is the last defense against the pork barrel, but a constitutional amendment may be required.
5. The federal budget should be required to be balanced. Exceptions should occur only when a recession is declared (by whoever officially does this now, but using the real estimates of inflation and GDP) or when a declaration of war (by the Congress) is made. And special purpose funds such as Social Security taxes should not be used to count on the revenue side.

The economy needs to grow in real terms without phony government issued statistics¹ making it seem better than it is. How?

1. Eliminate the IRS code and replace it with a consumption tax. (or national sales tax). This will flush out the underground economy in terms of tax collection. I recognize that a bureaucracy to run this is still needed, but compliance will be much improved. The only federal tax would be on purchased, non essential, items. The exact percentages for various items would obviously need much study so that the total revenue collected is sufficient to balance the budget and fund the needs of the nation. Low income folks that purchase mainly food, energy, housing, and clothing would have little if any tax. But the tax on items such as jewelry, boats, and marble countertops (to name a few) would be high compared to the typical current state sales tax. BTW, the typical sales tax in Canada is 10-15 percent.
2. Eliminate the capital gains tax. This tax change will increase the creation and funding for new business enormously.
3. Take the collection and reporting of economic statistics out of the Labor Department and any other politically influenced entities. Grants to universities to do these tasks might be best.
4. Eliminate the Federal Reserve Bank. First, its creation to control money supply is unconstitutional, since the Constitution says only Congress shall control the money supply. Second, let the free enterprise system actually be tried. Yes, there will be recessions, failed banks and businesses, and perhaps worse. So be it. The best thing that could happen right now would be the cleansing that economic recessions bring. Rational, risk adverse economic decisions would tend to follow at all levels from the individual person to companies and to government when everyone knows there is no bailout coming.
5. Pass a bill into law that prohibits any trading in public financial markets by federal government entities or their surrogates. This means the Working Group on Financial Markets would be disbanded. (For a description of this see http://www.marketoracle.co.uk/Article464.html)

We need more ‘ask what I can do for my country’ mentality. How?

Make military or other national service mandatory for all able bodied men and women. A five year college deferment would be allowed and the service length could be as little as two years (more for non-military service). Service organizations that perform duties such as cleaning up litter to landscaping on public property to the repair of hiking trails (this one is close to my heart) are some of the many examples. The more skilled among us could be enlisted to help improve the infrastructure before more bridges and roads collapse.
There needs to be a narrowing of the rapidly evolving class distinction between upper management and the low level employees. How?

Require that all public companies issue stock shares as part of the compensation to all employees on an annual basis after five years of service. A suggestion is to give the equivalent number of shares equal to 5 or 10 percent of the individual’s salary. The shares must be held for three years from the date of issuance.
Well, I will end this diatribe at this point, but at least I feel better having written it down instead of holding it all in!
¹ see www.shadowstats.com