Good comment thread: What's happened to the U.S. economy?

There's a good discussion revving up in the comment thread of Mark Frauenfelder's entry, Documentary examines possibility of US dollar collapse. The first major salvo came from Cowicide, twenty comments in, responding to arguments that the problem isn't that serious:
Not sure Operation Three Trillion Dollar War is helping too much, either...
* Link to video, transcripts of video, audio, etc.

BTW, this isn't some wackos... it's Nobel laureate and former chief World Bank economist, Joseph Stiglitz, and Linda Bilmes (Professor of public finance at Harvard’s Kennedy School of Government).

While we are at it:

Robert Kuttner on the “Most Serious Financial Crisis Since the Great Depression"
* Link to video, transcripts of video, audio, etc.

How the Wealthiest Americans Enrich Themselves at Government Expense (And Stick You with the Bill)”
* Link to video, transcripts of video, audio, etc.

Subprime Mortgage Crisis Causing African Americans to Experience Greatest Loss of Wealth in Modern U.S. History.
* Link to video, transcripts of video, audio, etc.

Yah, yep... I smell trouble... yep, I smell it.

Been smellin' it for quite a while, but it's getting stinkier and stinkier. Haven't even passed the dead skunk on the highway yet...

ConsideredOpinion came in with a balanced and knowledgeable analysis:
... Secondly - the impact of realignments will be felt unevenly across the economy. The super-rich will, by in large, remain insulated from these changes. The highly-educated (with marketable skills) will remain the most globally competitive, and barring labor movement restrictions should compete evenly against the best anywhere in the world for any currency. If the realignments can be 'dialed in' slowly enough, skilled industrial laborers should do better in the US ... but I don't care to think what this will mean for unions and the ILO. ...
Then Zuzu weighed in, and became the most prominent commenter in that thread. He's something of a monetarist, which is okay; monetarists are good on the consequences of grossly inflating the currency.
it's like nobody has ever been through a recession before... All this fear mongering is getting a little out of control.
I know people love their anecdotal evidence, especially in an economic discussion. But the concern here is pretty straightforward. From about 2001 - current the United States has funded a comprehensive restructuring of domestic government agencies (i.e. Homeland Security) with new and far-reaching "anti-terrorism" programs (e.g. Federal subsidy of enlarged state and local police, USVISIT, etc.), funded an invasion and ongoing active occupation of Iraq (at a cost of about $1 billion per month), while at the same time cutting taxes, and in September 2007 Congress raised the debt ceiling $9.815 trillion. The U.S. Government went from an ostensibly balanced budget in 1999, to a mind-boggling increase in spending, while at the same time collecting less revenue (i.e. taxes). How do they afford it? They increase the supply of money and credit through the Federal Reserve. This is a stealth tax. By debasing the fiat currency of the dollar, they spend the new dollars on the military-industrial complex to "keep us safe"*, which dilutes the value of the dollars we save in our bank accounts (or that we negotiated with our employers to earn in our paychecks), but all of the other goods and services are still just as scarce, so more dollars are needed for the same value to exchange for them, which is inflation.

(*Recently "keep us safe" has been extended to including bailing out financiers such as Bear Stearns and soon Lehman Brothers.)

The "Three Trillion Dollar War" or whatever you want to call it was all paid with inflation, which explains why the price of gold went over $1000/oz, why oil and food prices are up, but people are still generally acting as if dollars are worth what they used to be worth before the new money was created. (Arguably his is also why the Federal Reserve ceased publishing M3 data in March of 2006, and why the Department of Labor and Statistics has redefined the Consumer Price Index (CPI) to exclude energy (i.e. oil) and agriculture from its "basket of goods" estimation of dollar purchasing power.)

The economic crisis the United States can no longer ignore is the unwinding of this inflation. However, economists who speak on television or for politicians will tie themselves in knots and circular logic to avoid ever saying the word "inflation" -- it's like a taboo. So first they pitched this problem as a "sub-prime mortgage crisis", until now the problem is obviously not contained to just that market sector. Recently I've heard people start saying "contagion" like when the Asian Tigers melted down from their inflationary bubble in the 1990s.

But the crisis is simply that the Bush-Cheney administration has spent more money than God by borrowing and printing it (i.e. creating inflation), which in the central banking system of fractional reserve multiplies several times over into even more inflation. This creates an enormous market bubble -- that so-called "economic recovery" Bush has claimed in his speeches of yore. So this bubble didn't even feel like a bubble so much because the "improvement" was marginal over the pre-existing recession from the previous dot-com bubble and housing "foam" created by Alan Greenspan. But soon all of that inflation is about to collapse.

Think of inflation like those Warner Bros. cartoons where Wile E. Coyte runs off the edge of a cliff, and he can keep running and running on the air as long as he doesn't look down and realize that there's no more dirt beneath him. But eventually he looks down and plummets until he hits real dirt. That's what a correction for inflation is like.

And we've had this inflation/recession building up for approximately a decade now. It could take at least that long to get back out of it. So I would not chalk this up to "fear mongering". Fear mongering of the phantom menace called "terrorism" is what got us into this hole.

I'm reminded of an episode of Duckman (1994):

Once again, the U.S. is spending millions to oust a puppet they spent millions to get into office. They'll spend more millions on the coverup to hide having spent those millions and even more millions to discredit members of the media who report otherwise. It's a good thing they print their own money.
Other major comments by Zuzu:
* Inflation vs. deflation.

* Inflation, deflation, and the government's manipulation of the currency.

* A long, interesting quote on People & Power, rigged markets, the Plunge Protection Team, central planning, and the command monetary system (as opposed to planned economy).

Partway through that sequence, Fran Six popped in with a link to a set of charts she's constructed:
* A long-term chart depicting a deflationary boom since the Nasdaq crash in 2000 with its incipient manias in prices.

* The $US gold price divided by the $C with an overlay of a junior precious metal stock.

* The inverse of the gold/silver ratio.

* A very large chart depicting the silver/gold ratio with the added Wilder's ADX. Note the extreme position of the ADX indicator.

* A picture of insider buying for GBN.V in the last year.

* Oil price projection using fibonacci overlay.

* Dow Jones Industrial Crash, Oct. 1987.

* Nasdaq Crash, Apr. 2000.

There's one brief additional comment from Fran Six. She should feel encouraged to come back and explain more about those charts.

Near the end of the discussion's current endpoint, Spinobobot entered the conversation with a couple of comments (first, second) I'd quote at greater length, if this entry weren't already too long. He's in favor of welcoming our new robot overlords. Mostly, he talks about things monetarism doesn't:

In seriousness, I simply don't understand why some people trust "the market" to solve all of our problems. This quote particularly got me:
"You can't expect bureaucrats to know better than the market itself."
This market fundamentalism in which any economic woes are blamed on attempts to regulate and interfere with the economy is as unfalsifiable a position as the that of Marxists who maintained that the Soviet Union and other Communist nations weren't really Communist, because a true Communist nation would be successful. As though we didn't already see the fallout of total laissez-faire in the 19th Century.

I take your point about the problems of bureaucracy and I definitely think that market processes which are response to things like supply and demand have their benefits. I don't want to see the elimination of markets by any means.

But we need to put constraints on markets, establish certain kinds of incentives that exercise a general direction for how things will go. What I really don't like about unchecked markets is the way that they destroy common goods. Self-interest is not the only viable human motive.

The conversation's not over.