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An Economy of Illusions

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For the past four years, talking heads, pundits, and other regime apologists have been looking for “green shoots” and other signs of an economic recovery to vindicate the U.S. government’s fiscal and monetary shenanigans.

So when the Bureau of Labor Statistics (BLS) released its report on October 5 showing the creation of 114,000 new jobs in September and a reduction in the unemployment rate from 8.1 percent to 7.8 percent, it was hailed by many as a major victory for the Obama administration and the Federal Reserve. Indeed, it was cited as proof that all the deficit spending and “quantitative easing” (money printing) had finally paid off.

Well, maybe not.

It turns out the methodology the BLS used to produce their rosy jobs report is rather dubious. As Mark Twain said, “There are three kinds of lies: lies, damned lies, and statistics.”

According to the BLS, “In September, 2.5 million persons were marginally attached to the labor force.” These people “wanted and were available for work,” but “they were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.”

So the BLS’s official unemployment rate simply ignores 2.5 million unemployed Americans. I suppose that is more humane than conscripting them into work brigades or “disappearing” them into FEMA camps, but it’s still dishonest.

Stock prices predictably soared in reaction to the phony good news, providing further evidence that Wall Street has become totally decoupled from the real economy.

For a more accurate rendering of economic conditions in the country, one should look at the statistics showing a dramatic increase in involuntary part-time workers (600,000) and a concentration in low-paid service jobs. Manufacturing also continued its demise, shedding some 16,000 jobs in September.

The United States is rapidly becoming a nation of the underemployed, barely scraping by and desperate for part-time work in order to make their ends meet. This is the face of the “new economy.”

And to make matters worse for the beleaguered American worker, inflation appears to be rearing its ugly head once again. The consumer price index (CPI) increased 0.6 percent in August, thus raising the specter of stagflation (simultaneous high unemployment and price inflation).

The Obama White House is certainly not the first administration to fudge numbers in order to paint a false picture of prosperity. Republican and Democratic administrations have been underreporting the unemployment and inflation rates for decades.

According to John Williams of Shadowstats, the current real unemployment rate is around 22 percent, while real annual inflation is above 10 percent. Those numbers are indicative of an inflationary depression; so it’s understandable that incumbent politicians would favor the BLS’s rosy report over grim reality.

Tens of millions of Americans recently tuned in to watch Barack Obama and Mitt Romney face off in a debate over the state of the US economy.

While the candidates exchanged accusations and talking points, neither mentioned the Federal Reserve, QE3, Uncle Sam’s $220 trillion in unfunded liabilities, the crisis in the eurozone, nor the impending collapse of the U.S. dollar as the world’s reserve currency.

All of those are critical economic issues, and how they are resolved will have an enormous impact on the lives of every American. But they received nary a mention during the hour-and-a-half debate about the economy.

The ugly truth is the system is busted, and voting for Romney or Obama isn’t going to make any difference at all. Neither man has the courage, understanding, or wisdom to implement the radical changes that are necessary to right the ship of state.

And then there are the recent exploits of the Federal Reserve.

The Fed has held interest rates at zero for four years and just recently announced that they will hold them there for at least another two.

This means that real inflation will continue being higher than interest rates. Such an easy-money policy is very hard on savers, who are now getting a negative return on their capital. With the Fed effectively telling people not to save and instead to consume as much as possible before their money suffers further devaluation, the nation is devouring its seed corn and thus ensuring an economic famine in the near future.

How can the middle class survive under such a monetary regime?

It cannot.

If the Fed continues with its money printing, the vast majority of Americans will be impoverished and made wards of the state. Indeed, with more than 45 million Americans already receiving food stamps, the country is well down this road to serfdom.

The core economic problem is that the country has been borrowing and spending well beyond its means for decades. Now that the bill has come due, the Fed’s response is to create more money out of thin air.

Money is a medium of exchange. But in order for money to function in that capacity it must be a store of value. How can the Fed conjure up tens of billions of dollars per month, thereby draining the currency of its value, and expect it to continue functioning as a medium of exchange?

This point is illustrated brilliantly by Chris Martenson of Peak Prosperity. He writes,

What does it mean that the Fed can just up and print $40 billion per month indefinitely without performing any work whatsoever?

Well, let’s put that in context. If an individual earns $50,000 per year, then each month the Fed is effectively printing up the yearly output of 800,000 such individuals. Said another way, if you earn $50k, then you’d have to work for 800,000 years to earn the same amount of money the Fed prints each month.

Given that the median household income is ~$50k, this means that after one year of MBS purchases, the Fed will have printed up as much money as 9,600,000 households will have earned. Presto! Just like that, the Fed is effectively creating the exact same purchasing power as nearly 10 million US households, or 25 million people (I’m rounding a bit here).

And nobody had to do anything except push a key on a computer a couple of times.

While the Fed can wrap this magic act in all sorts of covering language about dual mandates, maximum employment, and price stability, the simple fact remains that money printed out of thin air cannot, has not, and will not ever lead to prosperity. How could it? It arises without any effort at all, no work performed, no goods transformed or lives improved, no land planted and tended well, no services rendered, and no capital formed. It is just conjured into existence.

The truth is that in our central-banking, fiat-money system, the money in our wallets does not represent value. It represents debt. The more money in circulation, the more indebted we are as a society. Every dollar is a claim against us and our progeny. This has to do with the convoluted way the Fed manipulates the money supply, which involves the purchasing and selling of government bonds.

It’s a perverse and exploitive system that needs to be scrapped forthwith. Unfortunately, this has led many critics of the Fed, particularly those on the Left, to call for a form of greenbackism whereby Congress rather than the central bank would control the issuance of money. That would hardly be an improvement over the current system. Indeed, it could be much worse; imagine the likes of Harry Reid or Barney Frank controlling the nation’s printing presses.

As for now, we still have an economy based on fiat-paper money, political rhetoric, statistical illusions, and central-bank sleights of hand. The Fed has given up even the pretense of basing its actions on any coherent monetary theory and is now engaging in blatant debt monetization.

The root problem is the politicization of money. We need to scrap the notion of monetary policy entirely and institute free-market money. Let the market determine the currency.

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    Tim Kelly is a columnist and policy advisor at The Future of Freedom Foundation in Fairfax, Virginia, a correspondent for Radio America’s Special Investigator, and a political cartoonist.