January 3, 2013 Reading Time: 3 minutes

With an annual growth rate of only 1.2%, the Federal Reserve reports that America’s iconic manufacturing industry is on pace for its toughest year since 2009. But the true state of America’s manufacturing industry is far gloomier than what the government reports. Despite claims of real manufacturing output rising over 80% since employment began its 40% decline in 1978, nothing could be further from the truth. And once again, America’s reckless monetary policies are at fault.

The only way the Fed can report that real output remains at historic high levels is because the CPI has been underestimating price increases for three decades (for further explanation see shadowstats.com). Based on the original CPI method, manufacturing output actually peaked in 1988 and after its 5% reduction this year, output will sit 57% lower than its peak. Such a figure maybe jaw dropping, but it only puts a number to the harsh reality that the U.S. barely manufactures entire industries of goods, such as clothing and electronics, that it once dominated just two decades ago. Economists have largely attributed the reduction in manufacturing employment to new machinery and cheap foreign labor, but these are merely fallacies. The decline of the manufacturing industry is due to the loss of economic freedom in the U.S. that has burdened businesses with costly regulations and diminished savings, the very lifeblood of manufacturing. When savings increase, interest rates naturally fall, productive capacity expands, and living standards improve universally. No single cause exists for why Americans save less, but no culprit has done more damage than the fiat monetary standard ushered in by President Nixon.

People don’t save out of human nature, but out of necessity and incentives. During the Industrial Revolution when the U.S. was on a bimetallic standard, credit was scarce and usually only available to businesses. The use of gold and silver also meant that the government was forcibly kept small: inflating the currency was not an option and increasing taxes and debt was unpopular. As a result of sound money, Americans were forced to save for holiday shopping and to finance big ticket items. Since safety nets provided by the federal government did not exist, Americans had no choice but to save for a rainy day and retirement. And with real interest rates at more than 5% on traditional savings accounts, people had an incentive to save

As America’s monetary system slowly transformed from bimetallism to fiat currency, the incentives and necessity to save diminished. Thanks to an abundance of consumer credit and negative real interest rates on traditional savings accounts since the early 1990s, Americans are no longer forced to save up for big expenditures, and in fact lack the incentive to do so. Because of the printing press, the government has rapidly expanded social welfare programs such as Social Security, unemployment benefits, and student loans. Therefore, Americans can reduce or forgo saving for retirement, rainy days, or even to send their kids to college.

Savings is not only necessary for the expansion of the manufacturing industry, but for the maintenance of it. Manufacturers often have to borrow to replace worn out equipment and broken machinery. When saving rates began to drop in the 1990s, manufacturing output in the U.S. stagnated; but when savings rates plummeted in the 2000s, so did output. Hitherto, American manufacturers have been bailed out by foreign governments propping up the U.S. economy, unknowingly at the expense of their own economies. However, this cannot last forever due to America’s out of control budget deficits and monetary policies. When foreign governments allow their currencies to rise against the dollar, interest rates and capital costs will soar in the U.S. Despite the devastating drop in manufacturing output since the late 1990s, this is only the beginning. Please visit manufacturingcollapse.com for more information.       

Devin Roundtree received his M.A. in economics from the University of Detroit Mercy.

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