White Trash Micro (yet another one of my posts you should read but probably won’t)

Ok, it’s time again for me to pretend I didn’t waste 6 years in college getting my degrees. Economics time: Why is it that the government is playing white trash economics?

Case and point, State of Florida. Republican governor campaigns on the traditional flawed concept that the people should be given tax cuts in order to stimulate economy. As explained here before, broke people make horrible budget decisions and giving them tax cuts starves the community infrastructure and social programs (the only hope they have to make it out of their predicament) and transfers the wealth to electronics makers (foreign) and fuels conglomerates that only offer low wage jobs (walmart, mcdonalds). The trick here is that the tax cuts only benefit the richest people, who tend to be rich because they can manage their finances. You can have a Ph.D in economics and not balance $260 a week right.

So what happened in Florida?

Charlie Christ campaigned on a platform to cut taxes and reduce insurance rates. This appeals to everyone: “Fuck the man, I want my money.” which sounds great in theory, horrible in implementation when you realize that everything you take for granted from school systems to roads to police to fire departments is funded by those taxes.

The debit/credit system is pretty easy. You start out with a pile of money. You start paying your bills (police, fire departments, etc). The pile gets smaller. You collect taxes, the pile gets bigger. You start spending the entire pile, it goes down to nothing. You have no pile. You got bills. Now you go into debt, start offering municipal bonds. Now you not only have a no pile, but you also have a hole in the table. Then you decide to take less and less money from the people that rely on the infrastructure, and you tell them to go spend it to stimulate the economy. When you buy retail, you buy from a minimum wager. No ifs, thens or buts about it. They need more people, so they start hiring.

With me so far? Looks good, doesn’t it? Bills are being paid, people are happy they got more cash in the pocket, everywhere you go there are lines.. you feel good! What’s not to love?

Well, after a little while the bonds stop selling. People stop investing. Revenue to the state goes down, and the municipalities which got rid of the “high taxes” now can’t pay the police departments, schools, fire departments, roads, etc. People start bitching.

So then Charlie Christ turns onto the corporations, likely the ones that didn’t contribute to his campaign, and says the insurance rates are too high. People can’t afford insurance. (makes you think what they spent their refund checks on then). So they decide to start imposing limits on the corporations that have free will and decision making abilities outside of the governments influence.

Government tells the corporation it will have a roof (rate limit) it can charge. The corporation sticks its middle finger in the air and yells “Kiss my black ass” and tells the state it will not insure any new policies in the State of Florida.

So let’s try to sum this up, we got $200 a year back in taxes but our cities now cannot staff fire departments, police, etc. I am sure it will be of little comfort to know that you have a 42″ plasma when you get shot and paramedics take an hour to come scrape your ass off the sidewalk.

This is as white trash as it gets. Your only hope as a private citizen of getting out of the hole (that you have dug yourself by overspending, underinvesting, undersaving and then having the balls to ask for a refund) is to hope that a) your insurance doesn’t get cancelled, b) that your house is not appraised revealing a far lower valuie, c) a huge category 5 hurricane flattens your house so you can cash out and move to a country with some fiscal responsibility. Or Tennessee.

So what happened in Washington?

Federal Reserve, a private non-government entity, under Greenspan’s leadership pitched teaser rates to stimulate economic growth. They then proceeded to raise those rates 17 times. Now, they are in a panic mode trying to cut the interest rates so they can lend more and create a more liquid money system for an economy that is basically trying to pay off its Visa bill. Where is the crisis?

What federal reserve actually does is create a pool of money for banks to borrow from to keep their markets liquid. All your deposits do not sit in the banks vault, actually, a very tiny portion of it does. The reason the bank begs for your deposits is because it can then take that money and lend it out through mortgages and get a far higher interest rate than it is paying you. The bank is investing in its customers using the money you used to invest in it. So you go to the bank and drop a $100 bill. They take $90 of that bill and lend it out. Assume only one other customer, in order for the bank to have cash on hand it can borrow money from other banks OR from the federal reserve.

Now… the banks are acutely aware of just how screwed our economy is, how many people are not paying their credit card bills, how many are due for a forclosure, etc. So when another bank comes over to ask for money.. well, the bank says no way. But the bank thats begging for money needs to give its cash to their clients. After all, it’s their money!

So the bank goes to the Federal Reserve, and borrows at a higher rate.

Every time “the Fed lowers interest rates” it basically says that it will lend money to the banks at a lower and lower rate. To sum it up:

Banks know their customers. Banks are unwilling to lend one another money because they are all aware that everyone is holding a giant pile of poo (commercial paper) that will be written off the books (lost) and the Federal Reserve is doing all it can to keep on lending the money to the banks to pass them over and hope for another strong consumer cycle that pays off some of the enormous debt the banks have gotten their customers in because eeeeeeveryone from the customer to the bank to the fed to the, yes, white house.. got too greedy.

And now we enter white trash economics, the concept of endless debt shifting in the hope that it never catches up with us. While we do this, however, that debt keeps on raising and prices keep on going up and foreign interests are buying up our country and we will all (99.1%) soon be slaves to our own excesses.

Who gives a shit?

Your infrastructure is soon going to start to suffer. Roads, services, conveniences, construction.

Jobs are going to suffer too, followed by retail. The less jobs there are, the more higher paying jobs go to lower paying jobs and people have far less to spend.

Inability to spend accelerates into inability to meet debt repayments.

Banking system collapses. Dollar all but has already.

Game plan: stay liquid, invest only into items with short term payoff, business-wise bet on failure and take the low interest rates – trade your cash for nothing. Diversify the cash into different currencies, precious metals, items of true value (not vapor value: stocks)

This is a self-fulfilling prophecy: when people get scared and stop spending they accelerate the problem of slow economic growth. The system collapses because people believe it will collapse while they sit on their hands. The alternative is called the greater fool theory – the idea that we can spend ourselves out of the problem of overindulgence and nobody will eventually get stuck with the bill. Truth is, in a system with finite resources someone ALWAYS get stuck with the bucket of crap at the end of the day, and it might as well not be me. Who will it be? The folks that traded in their prosperity for a $200 tax credit.

But what do I know, Go Gators!