The
New Year unfailingly raises spirits, even for those who don’t imbibe.
It represents a clean slate, a new start and a time to make resolutions
to improve ourselves and our lives. It is a time for renewal.
Economists and politicians are not immune to optimism. Many
economists project wonderful things for the coming year. Likewise
Republican political pundits are especially ebullient, anticipating
major political changes. Unfortunately, these expectations are no more
realistic than our personal resolutions and have similar shelf-lives.
The Economy
2011
begins with the government-driven mantra that a recovery is under way.
“The Recovery Summer,” was accompanied by similar fanfare, only to
become the subject of late-night TV jokes. The 2011 recovery meme will
be as valid and fleeting as that of its predecessor.
Why the optimism? The government has not changed course. Its previous
“solutions” have been ineffective and exacerbated problems. Just as you
cannot cure a hangover by drinking more, you cannot cure a debt problem
with more debt. Both forms of temporary relief risk irreparable
long-term damage.
A year ago, in Happy New Year Now Go to the Bomb Shelter
commentary was offered about 2010. The key prediction was that there
would be no recovery, and that recognition of the seriousness
of our economic plight would become apparent:
The year 2010 is likely to be the pivotal year where
pundits stop referring to the recession and begin openly talking about a
Depression.
No recovery occurred, despite claims by the NBER that the recession ended in June, 2010. Neither will 2011 see any recovery.
In
my opinion, we are in the beginning stages of an unavoidable Great
Depression. Recognition is not widespread because of the concerted
attempt by government and its media allies to minimize problems. The
recovery propaganda machine is incessant, powerful and committed.
Nevertheless, understanding is growing that something bigger, more
destructive and longer lasting than the typical recession is upon us.
The unsustainable debt piled up over the last thirty years continues
to grow exponentially. Deficits are so large that they force the Fed to
utilize Quantitative Easing. Last year the Federal Reserve had these
options:
- The Fed continues its QE beyond their planned cessation in March 2010.
- The Fed raises interest rates to levels that would attract the
capital necessary to fund government operations via conventional
credit markets.
- No Fed action is taken. That would cause the government to default on some of its obligations.
It was easily predicted the Fed would continue QE and that QE would not work:
Of the three alternatives, what is best economically is
worst politically. This natural conflict between good economics and good
politics is not unusual. Economically, the country would be harmed
least by implementing alternative 2. From a political standpoint,
alternatives 2 and 3 are probably unacceptable. Thus, it is likely that
alternative 1 will be used. Again! It is precisely the continual overuse
of this alternative that led to the current, sad state.
The best that we can hope for is continued malaise. That probably means the following:
- Employment does not recover.
- Stocks, probably overpriced already, might or might not do well as the Fed continues to pump liquidity.
- Commodities or “hard assets” will likely do well as a play on worldwide fiat currency depreciation.
- Housing prices will continue down, perhaps as much as an additional 15 – 20%.
- Bonds will do poorly once it becomes apparent that the government’s only tool is to inflate.
- QE will continue for the entire year and probably beyond.
QE,
at this point, has nothing to do with saving the economy. It is
necessary to enable the government to continue paying its bills. It
likely will be necessary beyond 2011.
The result of past and present government politices is that we are
left with no good ending. For 2011, the best outcome is continued
economic malaise. The worst outcome is the “crack-up boom” of which
Ludwig von Mises warned:
There is no means of avoiding the final collapse of a
boom brought about by credit (debt) expansion. The alternative is only
whether the crisis should come sooner as the result of a voluntary
abandonment of further credit (debt) expansion, or later as a final and
total catastrophe of the currency system involved.
I have speculated that this ultimate ending becomes a hyperinflationary depression:
… we likely end up with the worst of all worlds. In a
hyperinflation, money will cease to be a medium of exchange. Markets
will cease to work, except on a barter basis. The middle class will be
wiped out. Their savings will become worthless along with the dollar.
This ending is not predicted for 2011, although it could begin
tomorrow. Recent and continuing policies by government move us closer to
Mises’ outcome — a devastation of the economy. When this ending comes,
it will be typhoon-like, appearing suddenly and rapidly destroying
everything.
Politics
The 2010 election changed the composition of Congress. That change
raises hope that Congress will be able to dramatically reduce spending,
possibly avoiding the tragic Misesian ending. This hope will soon be
dashed.
Politicians
are little more than frustrated actors — too stupid for radio and too
ugly for TV. They are not the country’s “best and brightest,” courageous
or statesmen. The last act of political selflessness was George
Washington refusing a Kingship. Offer that today and people would be
trampled in the political stampede. You can count on two hands those who
might decline the offer. You might need only two thumbs!
While voters recognize the unsustainability of our present course and
demand cuts, it is a global demand. “Don’t cut my programs; cut the
other ones” is the local demand.
This message is the one heard by vote-seeking politicians. The
dichotomy between individual incentives and the interests of the country
is described by public choice theory:
As James Buchanan artfully defined it, public choice is
“politics without romance.” The wishful thinking it displaced presumes
that participants in the political sphere aspire to promote the common
good. In the conventional “public interest” view, public officials are
portrayed as benevolent “public servants” who faithfully carry out the
“will of the people.” In tending to the public’s business, voters,
politicians, and policymakers are supposed somehow to rise above their
own parochial concerns.
Socialist government
grows by including virtually everyone as a beneficiary. Behind every
dollar spent is a voter-beneficiary. Every dollar taken away harms the
voter-beneficiary. Reversing the welfare state cannot occur without
alienating constituents. It is this reason why no political solution
will be meaningful enough to avoid economic devastation. The cuts
required are too massive.
Different noises will emanate from Washington, but little more. The
newly elected Republicans will voice fiscal responsibility. The old
bulls of both parties will defend (at least privately) the status quo.
The battle will not divide along ideological lines, except for the
extremes of both parties. Congress will produce cuts and compromises,
accompanied by the usual political pomp and self-congratulations.
Nothing done, however, will be meaningful enough to alter the path to
destruction.
If you are an investor, go long smoke, mirrors and gimmicks.
Political demand for these items will soar. Without courage, politicians
have nothing left to convince people that things have really changed.
Conclusion
The required cuts are too massive for politicians to implement, and
the economy cannot recover without them. Heavy and growing government
spending and debt suck resources from the productive sector to support
an insolvent government. Each passing day weakens the productive sector
further.
The country has a destination-certain with a date-uncertain. It is akin to strolling down “The Green Mile” without knowing how close “Old Sparky”
might be. Are we moving fast enough to get there in 2011? No one knows.
Our best hope for 2011 is Japanese-style stagnation. Our worst is “Old
Sparky.”
Time
is the enemy. Inaction and phony political solutions only move us
further down “The Green Mile.” Feckless politicians, no matter how
clever, will eventually encounter Stein’s Law (named after economist
Herb Stein):
That which cannot go on forever won’t.
Then “Old Sparky” has us, and economic Armageddon occurs.
As I commented elsewhere:
One hopes that this tragedy unfolds fast enough that our
freedom still remains. If so, we will rise from the ashes painfully but
quickly. If not the world may enter an Economic Dark Ages.
Pass the bottle; I intend to pretend it is New Year’s Eve.
This post originally appeared on American Thinker.
