Where does it all end?

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The big news: The U.S. labor market is improving all right — but not in the way the government would have you believe.

Walt Disney’s Robert Iger got a 30 percent pay hike last year, taking home total compensation of $28 million.

The CEOs at DirectTV and at Stanley Black & Decker made even more — over $32 million each.

But Occidental Petroleum CEO Ray Irani made more than both those guys combined: He raked in $76 million (after a 142 percent jump in comp).

And consider Viacom’s P. Dauman, who bumped up his take by 149 percent and made $84.5 million!

All in just one year!

Heck, if you’re an average American worker and you’d like to make that much money, you’ll have to work for 2,074 years. (With no long vacations or leaves of absence, of course.)

And if you think that’s “a bit too long,” consider workers making the federal minimum wage of $7.25 per hour. To match the earnings of Viacom’s CEO, they’ll need 5,825 years of hard labor. Heck, even if Methuselah could have lived till 2011 A.D., he still wouldn’t have made it.

Granted, few Americans want a socialist-style “equality.” But for anyone who still subscribes to some notion of fair play, these kinds of numbers can invoke only laughter or nausea.

The more pressing issue, however, is about all those who don’t have a job to begin with. Sure, Washington rejoiced on Friday, announcing that the official unemployment rate ticked down to 8.8 percent. But that narrowly focused number overlooks three shocking realities:

Shocking reality #1 is this: If you include discouraged workers who have given up looking and part-time workers who want a full-time job, the Labor Department’s “all-inclusive” unemployment rate in the U.S. (dubbed “U6”) is 15.7 percent.

Shocking reality #2: But that 15.7 percent figure still excludes folks who have given up looking for more than a year. Economist John Williams of www.shadowstats.com estimates that if you include them as well (as the government used to years ago), the true all-inclusive jobless rate in America is 22 percent!

Shocking reality #3 is an admission that comes from the U.S. Labor Department itself. In March, only 64.2 percent of the adult population was participating in the labor force. That’s an all-important measure of the dire state of affairs. And it’s now stuck at lowest rate in over a quarter century (see chart).

Is this all we get from trillions of dollars of stimulus and trillions more of Fed money printing?

Unfortunately, no! Those trillions also buy much bigger trouble — in the form of the greatest-ever debts to foreign countries and to future generations.

But I’m not the only one deeply concerned about America’s future.

Senator Mark Warner says “we’re approaching financial Armageddon.” Senator Joe Manchin declares that our national debt and deficit are a “fiscal Titanic.” And ten former chairmen of the White House Council of Economic Advisers warn of a crisis that could “dwarf” the debt collapse of 2008.

Where does it all end? Right now,
experts see only two broad choices …

Choice A. We embark on a deflationary path — massive cutbacks and falling prices. Following in the footsteps of Ireland or the UK, Washington slashes government spending and risks the kind of mass protests we saw on the streets of London last Saturday.

Choice B. We continue on an inflationary path — more spending, more money printing, and surging prices. We follow a trajectory reminiscent of Brazil in the 1970s, of the failed governments of the Middle East, and even the hyperinflation of pre-Hitler Germany.

Now, here are my next questions, first asked in my Money and Markets last week …

Which one would you pick: A or B?
Or is there a third choice?

In response, friends on my Facebook page have come up with some very interesting answers …

Lisa C. writes on my Facebook wall that deflation (cutbacks and falling prices) would be “the lesser of the two evils,” especially if the sacrifice is shared by the rich and powerful. “What if enough people just refused to play the game?” she asks. “I think a lot of people are on their way to doing that.”

Myron P. may be one of them. He says: “I am staying home more, cooking all my meals, baking my own bread, paying down my debt, growing a garden … anything I can to save a buck. I know some of these things sound extreme, but at least I know my money will serve me well when I need it.”

James S. adds that the solutions will either come with a mass movement or through the normal chaotic democratic process. “It’s nothing new,” he writes. “Sometimes it’s necessary for life forms to make the choice between change and extinction.”

Drina F. concludes that there is a third choice: To compromise — lower spending and appealing to everyone to do the same. “Maybe there would be some deflation,” she writes, “but not a crisis.” In contrast, she believes money printing “seems unconscionable — it’s taking something that doesn’t belong to you.”

Thank you — and many others — for your great input! Now, let me weigh in on the debate …

The End Game

When looking into our crystal ball — no matter how shaky or solid it may be — it’s easy to confuse what we think will be done with what we believe should be done.

Optimists hope that the “will” and the “should” are one and the same. Pessimists conclude that they’re the exact opposite.

Fortunately, in the real world, there is some connection between what most people want and what most people get. But to avoid confusion, let’s first cover the “should” side of the debate … and then talk about what’s actually likely to happen.

Lisa C. nailed the core issue on the head:

Deflation is the lesser of the evils.
Inflation is far more destructive!

Sure, inflation eases the burden of debtors. Even if you owe a lot of money, inflation helps you pay it off with cheaper, devalued money — less pain and more gain.

That’s the main reason inflation gives the semblance of “a recovery,” and even the illusion that “the debt crisis is over.”

But such benefits are almost invariably short lived. They are enjoyed mostly by the privileged few. And even if they’re more widespread or last a bit longer, they almost inevitably backfire in the form of new bubbles, new busts — an even deeper recession with more financial losses, more bankruptcies, and more layoffs.

Worse, the inflation comes with …

• Still more bad debts: Everyone, the government included, is once again encouraged to borrow, spend, and speculate — adding a whole new layer of burdensome debts in a nation that is already bogged down in the biggest debts of all time.
• Massive hidden unemployment: The official jobless numbers go down and politicians claim victory. But the ranks of long-term unemployed continue to grow. Moreover, even those who are employed suffer a steep erosion in the buying power of their wages.
• The ultimate moral hazard: Speculators, among the primary culprits of boom and bust, are rewarded with more cheap money and credit. Meanwhile, savers, essential to help finance a true recovery, are actually punished: If you’re saving for college tuition, retirement, or your long-term health care, after you deduct inflation and taxes, you earn zero — or less than zero — on your money.
• Erosion and destruction of the dollar: Surging prices come with a plunge in the purchasing power of the dollar. And as the value of the dollar falls, your savings are eroded or even destroyed. As a result, people have little incentive to work hard and every incentive to find alternative schemes for making money. Inflation corrupts society and sabotages efforts to bring about a lasting recovery.

In contrast, deflation is far less damaging to the economy and to society.

Yes, it can come with harsh financial losses, more corporate bankruptcies, and higher unemployment. But those consequences are largely unavoidable anyway. More importantly, there are major, lasting benefits that can come with deflation:

• A long-overdue reduction of burdensome debts: Debts are paid off or liquidated in bankruptcies. Bad debts are cleansed from the economic body, creating a clean slate for future growth.
• Real wages for the employed: Even in the worst case, 80 percent or more of the work force remains employed. And the money they earn is worth something. In fact, as prices fall, they can buy more with that money.
• Just deserts: Speculators who take the most risk during the bubble suffer the biggest losses, while those who have the foresight and prudence to save their money benefit from higher real interest rates. In other words, deflation naturally delivers the most punishment to those who cause the busts. And it gives the greatest rewards to those capable of investing in a true recovery.
• A stronger dollar: The U.S. dollar gains in purchasing power, giving every American a bedrock of value to strive for — to save and to invest prudently. This lays the foundation for shared sacrifice by families, local communities, and the country as a whole.

The Big Dilemma

Most people in the United States reject — and rebel against — deflation because they fear that they will be the prime victims. They will be asked to pay the price — cuts in Social Security and Medicare, lost jobs, even hunger and homelessness.

Adding insult to injury, they assume (based on hard evidence) that, while they suffer, Washington and Wall Street fat cats will continue to party.

Thus, for deflation to be socially and politically acceptable, it must come in three phases:

• First, personal sacrifices by the rich and powerful of Washington, Wall Street, and Main Street, including deep declines in their compensation.
• Second, widespread public support for non-governmental organizations that provide emergency assistance to the hungry and homeless.
• And third, as soon as the first phases are largely in place, major across-the-board cutbacks in government spending.

That’s what should happen. What actually will happen depends on you, me, and millions of others.

My forecast: Washington will push the debt inflation game as far as it possibly can — to the very brink of the financial Armageddon that so many of us now fear.

Will we fall over the cliff into an American Apocalypse? Or will an 11th hour event save the day? We can talk more about it on Facebook this week. (Click here to join the debate.)

But in the meantime, it’s absolutely essential that you continue to build up your defenses. You can do that passively by moving money to safety. And you can do it pro-actively by turning crisis into opportunity.

I’ll show you how to do both in my special Squawk Box conference call tomorrow at noon. So if you haven’t signed up yet, today is your last chance to do so. Registration is free, but closes promptly tonight at 11:59 PM Eastern Time. Click here.

Good luck and God bless!

Martin