Government has evolved into a Ponzi scheme dependent on two strategies. The first is spending ever more of other people’s money on themselves and toward their re-elections. The second is pretending what they do has no cost — to the productive, to the economy, etc.

 

 

By Monty Pelerin

 

Detroitification — It’s The Government, Stupid

Facts are stubborn things.

No matter how hard the Washington crowd tries to sell an economic recovery, inconvenient and contrary facts keep rearing up to shatter their myth making. Few people any longer believe the claims of declining unemployment or low inflation at least based on purchases they make.

The fable of a housing recovery is now crumbling:  New Home Sales Plunge 13.4% in July, June Revised Lower; Blame Rising Mortgage Rates; Starts 896,000 – Sales 394,000. Two weeks ago, the same author (Mish) provided this article: Mortgage Applications Decline 13th Time in 15 Weeks; Are Mortgage Rates Cheap? What’s Next For Housing?

Rising interest rates are blamed for the housing reversal.  As the late Gilda Radner would have said: “it’s always something.”

The recession, declared over in June 2009, never ended. Over four years later there has been no meaningful sign of a recovery. In spite of unprecedented government and Federal Reserve stimuli, the economy has barely budged  These actions have only masked the true condition of our economy and will make us poorer in the future.

Some wonder how bad the recession/depression might have been had government not acted. Others worry that we will find out when the Fed tapers.

What is Going On?

Newspapers and the economic cacophony emitted by pundits and political hacks only confuse the average person as to what is really happening.

Rising interest rates, the reason given for weakening housing, provide a convenient and plausible excuse. But explaining complex economic issues rarely can be answered by citing a single variable. Such an answer is simplistic and begs the more fundamental question of why interest rates are rising now. Addressing this issue does not lend itself to snappy sound bites. Furthermore, it leads into complex relationships that few are able or willing to follow.

An unwillingness to explore these more complex issues is just fine from the political standpoint. They lead to a  host of inconvenient and embarrassing issues regarding Washington’s mismanagement of the economy. The also enable economists to leap into the weeds of their particular jargon, theory, empirics and political leanings regarding the economy.

Let’s keep this discussion simple, which can be done by assuming away some of the noise and complexities like economists are wont to do. Let’s assume away economics and economists for the moment. Let’s pretend that neither exists and try to take a common-sense approach to the economic problems of the country.

As an economist, I think it worthwhile so that others, untrained in this so-called discipline, may better understand the simplicity of what ails the country. The pejorative “simplistic” is one hurled usually by people trying to protect their turf by using smokescreens.

Economics for Dummies

The reason why the economy is not recovering and will not recover can be explained in five simple points:

1. Wealth and standard of living increases can only be achieved by producing more, not less.
2. Capital increases are required to produce more. Wage gains are directly tied to productivity gains and more capital enables productivity to rise. US workers earn more because they are more productive as a result of having more capital (tools and equipment) to work with.
3. The private sector uses and expands capital. Firms that cannot achieve this result, go out of business. The remaining capital is taken over by better stewards. Successful firms grow, creating value, jobs, incomes, wealth and more capital.
4. Government destroys capital. It confiscates it from the private sector and uses it for consumption, effectively reducing the supply. Jobs, income and growth that otherwise would have developed do not. The rare exception is if government “invests” in capital projects like roads, infrastructure or meaningful education. If properly chosen, this government spending can assist in the production of capital.
5. The proportion of assets and capital confiscated has increased greatly over the last century. At some point, the capital and wealth left behind in the private sector is inadequate to reproduce itself. That is when economic growth turns negative and standards of living decline. Long before that point growth rates diminish.

It is this simple process which has crippled the US economy. Pointing to rising interest rates, declining innovations or a host of other variables as the cause of the problem is to miss the root cause of the problem.

Now What?

The golden goose has grown old and tired. It no longer has enough capital to achieve the performance of the past. The country is poorer than it should be as a result. Washington’s policies, interventions and disincentives are making it poorer still. These policies help Washington and its cronies. They lower the standard of living of the rest of the country.

Wealth (capital) enables economies to grow. It is the primary requisite for a rising standard of living. It provides the means to work less and have more. Workers are made more productive and achieve higher earnings. The well-known socialist economist Joan Robinson begrudgingly admitted to that fact at the height of Keynesianism and the intellectual attraction to socialism when she said the following of capitalism (my emboldening):

“The system is cruel, unjust, turbulent, but it does deliver the goods, and, damn it all, it’s the goods that you want.”  – Joan Robinson

A Simple Choice

Politicians do not want to discuss the economic problem in simple terms. They are the biggest beneficiaries of the welfare state which feeds their egos, desire for power and as a means to buy votes to retain office.

The golden goose upon which the horde of political parasites  feeds is not immune. It grows ever weaker and unproductive as a result of the predations. A decision must be made between two options: the Welfare State or the Prosperous State. There is no third way. The choice is to continue down this road to serfdom or to make a U-turn back toward prosperity.

Advanced stages of the welfare state will lead to its eventual demise. History is replete with governments that extended themselves beyond what their populations were willing or able to support. That is the point the US has reached. The so-called economic crisis did not begin in 2009 or even 2001. These were symptoms of the disorder and maladjustments that had been introduced into the economy years before.

We can continue down the current road and never see a return to economic vitality that was experienced only a few decades ago. Poverty, jobless and continued declines in the standard of living will increase. Ultimately the economy will collapse under its own weight or civil unrest will bring it down.

Or we can repeal much of the nonsense that has contributed to this problem and return  to the vitality, growth and rising incomes that characterized most of our history. That requires a massive reduction in government’s role in the economy and its spending.

These are the only choices that affect our destination. All other considerations are mere distractions and excuses. It is just that simple!

These comments are as relevant for the welfare states in Europe as they are the US.

What Happens Next

The choice above will likely not be addressed until an economic tragedy renders our economy dysfunctional.

Before that occurs, a collapse of financial asset prices (stocks and bonds) is a probable next event. The timing of such a collapse is not reasonably predictable, but current asset price levels reflect Fed-created smoke and mirrors liquidity. This re-inflated bubble will collapse just as the now deflating housing bubble has. What is certain is that something as irrelevant as rising interest rates will be blamed.

 

Not On My Watch

The political process destroys good economics. “Not on my watch” is a dangerous variant of Keyne’s “in the long run we are all dead.” Both approaches are responsible for the terminal state of world economies.

The Political-Economic Problem

The political charade regarding the budget-debt issues currently on-going in Washington is irrelevant to the real economic problem. The resolution of this sideshow has no bearing on a half-century of foolish economic policies that will doom the economy.

More stimulus cannot repair the economic problems. Nor can it solve an unbearable debt burden to which it has been the primary contributor. Einstein’s definition of insanity — doing more of what you know doesn’t work — comes to mind when listening to politicians discuss economic solutions.

The problem appears as an economic problem, but as most economic problems, its roots are political. Government has evolved into a Ponzi scheme dependent on two strategies. The first is spending ever more of other people’s money on themselves and toward their re-elections. The second is pretending what they do has no cost — to the productive, to the economy, etc.

“Manna-from-heaven” government is almost over. It has run out of resources, including its supply of smoke and mirrors. Nevertheless, government ways will not be abandoned willingly.

Quantitative Easing

The Fed’s quantitative easing program is all that supports what is left of a dysfunctional economy. If the Fed stops, the hollowed-out economy will fail and a Great Depression will occur. Free market forces will excise a half-century of distortions and mis-allocated resources. This cleansing will be painful, undoubtedly made more so by a government continuing to intervene in an attempt to mitigate or manage events.

Most politicians don’t believe that such an economic event is possible. Many do not believe that it is unavoidable. Even those who understand do not want their names associated with Herbert Hoover and do not intend to let it occur on their watch.

The Federal Reserve is the only obstacle between us and the massive economic catharsis. Ironically, the Fed is also the prime cause we have reached this point. Think of the Fed as a drug dealer who provided the feel-good past at the expense of current and future health. The economic body is finally succumbing to its overdoses of the money drug.

QE will continue until it can’t (as Herb Stein observed of all unsustainable policies). Its continuation may put off the economic collapse for a while (that time period is indeterminable), but only at the cost of greater dislocation and pain.

Not On My Watch

The Fed and the political class will continue quantitative easing, playing for an economic miracle. But economics does not believe in or allow for miracles. However, political miracles are possible.

Stopping QE is an act of political suicide. Politicians and bureaucrats do not willingly give up their careers. Hence, all want to continue money creation despite the fact that the economy will be made worse off.

Money creation may create personal miracles. For a politician, a personal miracle is “not on my watch.” If something terrible happens and they are not in office, then they are not considered responsible.  The amount of pain and harm done to society is a secondary consideration, behind the one concerning personal responsibility. “Not on my watch” is their guide to economic policy, not whether the policy is reasonable or not.

This behavior is another variant of Keyne’s clever retort to objections to his brand of economics — “In the long run we are all dead.” Economic policy focused on the short-run  almost always produces disastrous long-run consequences. Our economy has outlived Keynes’ short-run and is dealing with the long-run consequences. Keynes is dead. We must pick up the pieces and put Humpty Dumpty back together again.

The world and the US will continue to deteriorate as the effects from the monetary “hits” lessen over time. Current levels of QE are more likely to be increased by the Fed than willingly decreased.

How Does This End?

As a wise doctor friend once observed, one way or another, all bleeding eventually stops. So too, will quantitative easing. It will likely stop when markets stop it.

Quantitative easing will end in one of two ways — a debt implosion that plunges the economy into Depression or a hyperinflationary blow-off which drives people to barter (and Depression). I suspect the latter, but political miscalculations could lead to the former even though that is what they most want to avoid.

Economic Armageddon will arrive. Only its route and timing are unpredictable.

In retrospect, 2008 will be seen as an understated trailer for the economic horror movie still in production.

“Monty Pelerin” is a pseudonym derived from The Mont Pelerin Society. The writer has no connection with the Society (other than coincidence of philosophy). Nothing said by me should be considered to be representative of the views of the Mont Pelerin Society or any of its members. “Monty Pelerin”  blogs at Monty Pelerin’s World

Also please consider:

Smoke And Mirrors Running Out — Depression to Follow

A Message from Lord Vader

Has Obama Already Bankrupted America?

Is The Fed Acting Like a Day Trader?

17 Reasons the $17 Trillion Debt Is Still a Big Deal

Government Zombie Policies and the Rationing of Retirement

9/12 – the Manhattan attack that gave us Obama

The Corruption of America

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