Monday, July 20, 2009
Why the Economy Will Not Recover
I would imagine that the surging stock market and my silence concerning it has a lot of people wondering if I'm pouting that I've been spectacularly wrong, or perhaps even contemplating coming to my senses, giving up on my Mad Max predictions of American apocalypse, and joining the economic mainstream. The short answer is: neither. I'm sticking to my guns. The economy is still toast. So why the stock market rally? What of these "green shoots?" In case you've been living under a rock in the furthest corner of the deepest cave on planet earth for the past six months, the US government has been spending extraordinary volumes of money, running up tremendous levels of debt, and printing fantastic quantities of brand new dollars in an asset buying spree that would make a Zimbabwean central banker blush. This is all a Keynesian effort to spur "aggregate demand." Which is to say, it is an attempt to get businesses to keep doing exactly what they've been doing to make money throughout the bubble years, even though it is now known that the bubbles were bubbles, they weren't actually operating in a profitable fashion through quite a lot of it, and the stupidity of their behaviors has been revealed by the recent crash. But in the absence of knowing what to do, it appears that our leaders prefer that we do something as opposed to doing nothing, despite the fact that it is doing nothing that would reveal to us just what constructive activity we really ought to do next. I suppose they figure that doing the old something is preferable to the attractive new something of burning things down in anger over the mismanagement of our monetary system. Ahh, the irresistable logic of the fascist "cult of action." So, by pumping the system artificially full of money and supplying loads of artificial demand, the government has put the pedal to the metal. Problem is, the transmission is in neutral. So, we feel like things are moving and shaking, stuff is happening, and we're getting somewhere. There's a bit of optimism in that. But the reality is, we're wasting gas and tearing up our engine in the process. The new money is heating up old markets as the government fights the sweeping asset-price drop. Thanks to flying-trapeze FED policy, the new money is primarily staying in banks and financial markets, where it can paper over real losses to spruce up the appearance of financial assets and prop up confidence in the system without much effect on consumer prices. So far Ben Bernanke has managed to keep the game going. He's a sly one. The truth is, whatever economic school one belongs to, with all the sleight of hand going on and with the market making 40% swings over the course of months, anybody can lose money over a given period of time, even when they're completely right. Peter Schiff is one of the few mainstream Austrian economists with an actual investment company, Euro Pacific Capital. He predicted years ahead of time that we would see a crash, he was completely right, yet even he lost his investors an awful lot of money with the collapse in commodity prices which he apparently failed to predict. He, of course, thought that the mass inflation presently underway would flow towards commodities more than it has. And he is probably right, in the long term. But he didn't see the short term lock-up coming. And for all his prescience, it didn't prevent him from taking a big hit in the short term. Honestly, I'm not really sure when things will hit the fan once again. The fact is, the Emperor has no clothes. But that doesn't change the fact that the Emperor is immensely powerful, with far reaching influence and very, very deep pockets. If the Emperor desires to project an illusion and maintain an artificial reality, he has immense resources at his disposal to do so. You may be completely right in calling him naked today, but that doesn't mean you won't be run out of town and ruined long before the truth is revealed. So, we places our bets and we takes our chances. Where is your faith: in the truth, or the Empire? The truth is, the previous economy was a sham. It was unsustainable. It was an illusion. The government is "goosing the accelerator" in an attempt to restore what was. It is undeniable that the government has awesome clout at its disposal to shuffle us all about and create artifical economic currents that look and feel like recovery, just as it created the currents of the last few decades by opening up a gargantuan tab with an acommodating Asia that looked and felt like indefinite prosperity. The massive cash vacuum set up a flowing cash current, and quite a few dipped their tills into these flowing waters to turn a pretty looking profit. This flowing credit line kept the goods moving and the factories hopping and people busy for quite some time. But these are created currents. They are artificial, and won't sustain themselves. The fact that it lasted so long the first time around is a testament to the power of the vast cash vacuum which has become America's aggregated debt, but it appears to have reached its limits with its Asian creditors. So Uncle Sam has turned to the domestic variety, over which he wields coercive power, and the sucking has begun yet again. Cash is moving, a little. But the old, hopped up economy is not going to come back in a sustainable fashion. The new bubble won't be as big as the one that has just passed. It, too, will eventually come to an end. When will the illusion finally end, and the Emperor Uncle Sam revealed in all his naked un-glory? I don't really know. I will have to wait patiently, just like everybody else.