Monty Pelerin ~ EconomicNoise.com
At the risk of looking/sounding like some crazed religious fanatic usually seen carrying a sign or proclaiming: “Repent, the end is near,” I shall avoid the word “repent. To me, the rest of that proclamation appears accurate and reasonable, at least with regard to our economic condition.
The US and world economy are near collapse. Sovereign debt, driven by increasingly desperate government interventions, spirals upward at accelerating rates. There is no recovery and there can be no recovery with the debt levels of both governments and citizens.
Keynesian Interventions
For a time fiscal and monetary stimulus were undertaken in the hopes that they would enable economies to achieve traction and return to normal growth paths. The political myth of Keynesianism demanded such “conventional” tools be applied. Almost five years into the economic crisis, there has been no recovery, despite trillions of dollars wasted. Nor can there be one without massive debt liquidation and the redeployment of misplaced capital.
Lip service is still given to the pseudo economics known as Keynesianism. Die-hards like Paul Krugman and other Statists continue to insist it is the answer to a recovery and push for additional interventions. Statists defend this alchemy because it is the source of government growth and power. In applying more of these remedies, the ultimate resolution of the crisis is deferred but made worse.
Why Do Interventions Continue?
Interventions, primarily in the form of monetary expansion, continue. Many in the political class realize additional stimulus cannot solve the economic problems. The reason for favoring them is not for an economic cure but as a means to continue government spending at its unsustainable levels. Keynesian economics has always been a political rather than economic tool. The pretense otherwise is becoming harder to maintain. Lance Roberts, commenting on the latest Richmond Fed data, states:
The injections of liquidity into the system were able to drag forward future consumption, a consequence of which we will have to deal with later, in order to keep economic growth in positive territory.
This chart was part of the rationale for Mr. Roberts’ position:
The impact of no QE3, as described by Mr. Roberts, was devastating in July:
Shipments came to a screeching halt declining from 0 to -23 in July while Inventories rose from 9 to 21. Rising Finished Goods Inventories sitting on the shelves is not an economic positive as the build is likely unwanted given the weakness in New Orders. The weakness in orders also leads to decreasing rates of Capacity Utilization which slipped from -4 in June to -16 in July.
What If Monetary Easing Is Not Re-instituted?
Stopping monetary infusions means a downturn in the economy. The Fed will likely announce new stimulus, especially given the political election. The quaint notion of Fed independence and its unwillingness to take policy actions at this stage in an election cycle will be tested and found wanting. The Fed is a creation of Congress and a political animal, just as any other governmental agency. Incumbents, overwhelmingly want the appearance of a good economy in order to enhance their re-election prospects.
Daniel Amerman described the motivations for printing more money:
1. Creating money out of thin air on a massive basis is all that stands between the current state of hidden depression, and overt depression with unemployment levels in excess of those seen in the US Great Depression of the 1930s.
2. It is the weapon of choice being used to wage currency war and reboot US economic growth.
3. It is the most effective way to meet not just current crushing debt levels, but to deal with the rapidly approaching massive generational crisis of paying for Boomer retirement promises.
4. Political survival and enhanced power for incumbent politicians.
Not reinstating some form of quantitative easing (printing money) would quickly reveal the bankruptcy of the federal government. Last year the Fed purchased 61% of treasuries issued. The Fed now has surpassed China (who is attempting to divest) as the largest holder of US debt. Federal funding needs are no less this year and in the future. Without printing, government cannot pay its bills. Tax collections and private capital markets are insufficient to meet the level of spending.
Maturing debt can be retired only with the issuance of new debt. Government spending continues upward, never downward. The political elite of all countries behave as carnival barkers, promising benefits that cannot be delivered and plundering the productive in an effort to continue their failing scam. As Gerald Celente expressed it (my emboldening):
The entire financial system is under collapse. It’s not about the Greeks; it’s not about the Spanish; it’s not about the Italians; it’s not about the English; it’s not about the Americans; it’s not about the Chinese; it’s about everybody.
Capital pools, the normal source of funding, are not large enough to fund governments’ debt. Sovereigns survive only via the charade of lending to themselves via central bank money creation. The mechanics are made deliberately obscure, but that is all that keeps governments afloat. Central banks, questionable institutions to begin with, are now nothing but counterfeiting operations for governments out of control.
Capitalism has devolved into something little different from the central planning that was practiced under the Soviet Union. As Judy Shelton pointed out:
The problem for the Soviet government was that financing provided by the state-controlled bank was supporting an increasingly unproductive economy—bailing out unprofitable enterprises that had long since quit producing real economic gains that might have raised living standards. The extension of credit to these entities had little to do with merit or potential usefulness.
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