Why the US Economy is No Place for Small Business Growth

The Dow jumped 162 points yesterday. Up, down…up, down…when will it stop?

Never. That’s what prices do. They go up and they go down.

Discovering…discovering…the markets will never cease discovering….

And the end of all their discoveries will be, to return to the place where they began, and to know it for the first time…

Poetry! Yes, dear reader, poets are probably better able to tell you what is going on in the world than economists. Today’s economists are tied to their worn-out, crack-pot theories. They won’t give them up…even though they do not work.

Poets at least are on the right track…probing deep into the soft, easily-corrupted tissue of the human heart.

We’ll come back to that in a moment. First, we would like to tell you why unemployment is so high. Yes, dear reader, the pieces of the puzzle are coming together.

Why is unemployment so high?

Well, who creates jobs? Small businesses.

Big businesses cut jobs. That is how they maintain profit margins so they can pay bonuses to their over-paid managers.

Small businesses…growing businesses…businesses that are adding value and building wealth…create new jobs.

Why so few new jobs now? Because more and more money — capital allocation decisions — are in the hands of the feds. The feds always favor existing businesses…big businesses that make campaign contributions and whose lobbyists take them to lunch. They never favor small start-ups. The start-ups don’t have any money…or any lobbyists. The start-ups have no political power.

The feds favor big businesses in direct, obvious ways — such as tax credits, bailouts and government contracts. They also favor big business by making it hard for the start-ups to compete with them.

Let’s just say, dear reader, that you wanted to start a new kind of bank. You saw that the big banks are ripping off their clients…losing money…and getting bailed out by the feds. So, you figure you’ll do to the banks what Napster did to the music business or Amazon did to the book business. After all, moving money around is just an electronic, digital process. It should be dirt cheap to run a bank. You could even create a much better way for customers to hold their money. You could allow them to choose what currency they would like…or they could hold their cash in gold…just with a few clicks on a computer keyboard. You could set it up so no customer would ever lose money…because his account would be backed by, say, 100% physical gold. And you could cut credit card transactions and banking fees down to a fraction of what they cost today.

And you know what else? You could end inflation. And end the worry about choosing currencies…or hedging against one currency or another. You could create your own gold-backed currency!

Heck, it’s all information. A few computers. A few programmers. You could revolutionize the banking business and send the Bank of America into bankruptcy even faster than it is going on its own.

Do you think you could do that, dear reader? Well, the answer is no. You can’t. Because the regulators — put in place with the conniving cooperation of the banking industry — would stop you. Otherwise, some enterprising entrepreneur would have wreaked creative destruction on the banking industry year ago. And the dinosaur banks that remained would have been wiped out in the crisis of ’07-’09.

Instead, the feds came to the rescue of the big banks. The start-ups were shut down by the regulators. And the new jobs never happened.

That’s just banking…an obvious example. But in every industry the story is about the same. Existing businesses colluded with the feds to set up barriers to entry and to absorb savings which could otherwise be used to start small businesses. The US government runs a deficit that is greater than the total savings of the nation. It decides where these resources go. And one place they never go is to businesses that haven’t been created yet.

Government always favors the past. It is always reactionary. It is always backward-looking…trying to protect industries that were developed a long time ago. It always tends toward zombieism, in other words…

Uh oh…the press is catching on to what we’ve been saying for the last four years. This is a Great Correction. There will be no recovery. Here’s the latest from Reuters:

(Reuters) — Risks are rising that a moribund job market and potentially steep drop in inflation could push the United States into a downward spiral of falling wages and prices.

That nightmare scenario of deflation might seem remote considering a recent rebound in growth, and the Federal Reserve would almost certainly try to head it off, probably well before prices started to fall.

But some investors and economists say the risk is real.

Inflation is expected to more than halve over the next year as a spike in prices for goods like oil and grains unwinds. Unemployment, meanwhile, will likely hold at nearly double its pre-recession level well into next year, keeping incomes under pressure.

If forecasts are correct, that could present a dangerous combination the Fed might not allow to brew for very long.

“You run the models and that all points to deflation,” said Joshua Dennerlein, an economist at Bank of America Merrill Lynch in New York. “Without some kind of monetary policy help you would definitely get deflation.”

Already, many forecasts for price increases are lower than they were a year ago when the Fed announced it would pump $600 billion into the banking system to boost growth and counter fears of deflation, which were growing at the time.

The inflation rate, which hit a three-year high of 3.9 percent in September, could fall to 1.3 percent by October 2012, according to a measure of expectations calculated by the Federal Reserve Bank of Cleveland.

The General Theory of Zombieism

Many dear readers probably thought our focus on ‘zombies’ was a joke. But we’re as serious as we are about anything. And the more we look at what is going on in the US economy, the more convinced we are that zombies are behind it.

In today’s Daily Reckoning, we begin bringing together some of the clues we’ve been following. You will see that they lead us to the perp. And you will see for yourself: he is a zombie.

Zombieism refers to a tendency of things to become paralyzed and parasitic. When anything ages it becomes less adaptable, less flexible, more ‘stuck in its ways.’

You know the expression: ‘You can’t teach an old dog new tricks.’

That’s partly because the old dog is tired and doesn’t want to learn any new tricks. And it’s partly because he doesn’t need to. Old dogs just lie around. They eat, but they don’t hunt. Their joints are stiff. Their ambitions are few. They’ve figured out how to get the bone without much effort.

Likewise, old people often distrust anything new. They’ve seen that most new things don’t work out very well.

And they often become parasitic. They eat. But they don’t produce. It’s just natural. Often, old people mimic the grave before crawling into it. They don’t move. They don’t think. They shuffle around…like zombies.

Now, magnify these natural tendencies onto a whole economy, a whole society, a whole nation. The US has been in business for nearly 250 years. Is it any wonder it is a little fusty?

But today, instead of explaining the General Theory of Zombieism in detail, we are going to begin by asking you some questions, dear reader.

How come university tuition rose more than 8% last year, when most prices rose only half as much?

How come so few new jobs are created…in a society where so many intelligent, well-educated people are looking for work?

How come health care costs go up year after year — like education expenses — at twice the rate of the CPI…and people are no healthier?

How do the rich get richer in a capitalistic system…when the real value of capital is going down?

How come the government spends more than all the rest of the world put together on defense when it has no enemies to defend against? Why did it spend as much on the war against Iraq as in WWII?

How come the government now consumes more than $41 out of every $100 of national output…making it by far the largest allocator of capital in the world — when it is supposed to be a free enterprise system?

How come the US government — which is supposed to the best system that 300 million smart people can come up with — is actually a system that no sane person could possibly want?

All those questions have the same answer. The whole system has become zombified…taken over by unproductive, parasitic tendencies.

More to come…


Bill Bonner
for The Daily Reckoning

The Daily Reckoning