The Next Economy

"Peter Schiff was right". Paul Hawkens was right-er. The stimulus Obama is proposing is not going to work the way he would like it to. The problem is much deeper. Unlike the 1930s, we are not in a period of expansion; now, with the resources we've gotten used to using for that expansion (oil, water, land) going into short supply, we are entering a period of contraction - unless we learn to use new and different resources. Paul Hawkens predicted in detail the credit crunch that is becoming clearly visible in 2009. Between 1980 (when the essay that this book grew out of was first published in Whole Earth Review) and now, the propping-up that Hawken predicted has been attempted over and over again by U. S. Presidents and Congresses led by both parties, as well as other governments. But the trend, as Hawkens explains, is inexorable, and healthy. AND solutions are possible, and will come - despite government, not through government. It's called "disintermediation" and it's long overdue. What's sad is how we keep forgetting past words of wisdom, and have to keep re-learning. Re-read this, and then take another look at Alvin Toffler's "The Third Wave", another forgotten gem. Also in agreement with Thomas Friedman in: Hot, Flat, and Crowded. Nobody is listening to any of these folks. But it doesn't matter. It's the only thing that can happen, and it will.

1. The confidence game of debt and capital. The cost of capital will remain high. Communism failed because it allocated capital in unnecessary factories, faulty inventions, and the overproduction of goods - misallocating funds and bring no benefit to the economy. During inflation the value of money declines. Inflation represents the cost of capital. As price rises, the value of money declines, so to hold money during inflation is to see its value decrease. This why people are adapt to spend during inflation. In the 1970s, over 97 percent of the GNP was consumed and 2 ½ percent was reinvested. Much of the spending was finance through increased debt. The cost of capital will remain high through the transition from the mass economy to the informational economy. When the government borrows money from the private sector and spends it on government purchases, this is money not available for lending to businesses. Money supply and capital are not the same. Economist say that inflation results when the annual growth of the money supply consistently exceeds the rate of growth in gross national product. When inflation is rising and currency is falling, the sensible thing to do is get out of currency and buy something that will rise with the tide of inflation. Between 1950 and 1980, federal debt rose 300 percent, consumer debt increased 1,300 percent, mortgages increased 1,500 percent, and state and local government 1,300 percent. The debt has been increasing and growing faster than the nominal rte of economic growth. As the amount of money required to service debt increases, less money is available for investment and as growth slows, the more difficult it becomes for the economy to meet all of its debts. As greater demands are place on existing capital to pay debt, interest rates go up, making the expense of carrying debt even more punitive to everyone. Corporations are purchasing growth and earnings by going more deeply into debt. Real-Interest rates can be calculated as the difference between inflation and high-quality long term bonds. In 1982, real interest rates were 7 to 8 percent, a fifty year high and the normal real interest rates of 2 to 3 percent. The fed placed reserves in the economy, fearing economic collapse; as debt increased faster than the rate of economic, it increased the demand for cash and raised interest rates; the rapid increase in money supply created inflation and a new upward spiral of debt as individuals and businesses tried to borrow. The nations need for new debt increased in order to keep afloat during economic contraction. 2. We are in an economy that requires more dept to survive but whose ability to sustain the debt in declining. The structure of debt could no longer be sustained by the economy, and a long painful period of deflation and liquidation took place. 3. A new trick, Companies use the currency exchange rates to higher report earnings for sales in foreign countries, as the dollar demises, th