While these professional economists are certain to draft future Federal Reserve and Treasury policy for the next four years, they have never had practical business experience, such as lending their own money and surviving only if the money is paid back. Without real experience, these Keynesians can't help but omit from the discussion the stunning reasons why the economy is stuck in a credit quicksand. Worse yet, they share the view that the only way out of this mess is to print up massive amounts of money and push government spending to end the credit crunch and get liquidity flowing again.It's not a liquidity crisis. The problem is not insufficient money out there to borrow. It's a balance sheet crisis. Everyone is too far in debt to borrow even if the money was there.
Lending without being certain the borrower can pay it back is how we got to this point. Mish takes apart the stimulus bill for just this reason.
(N)one of this spending can possibly stimulate anything. Take for example $62.3 billion for transportation or the $91.3 billion to renovate schools. What happens after the schools are renovated and the potholes are filled? Where will the jobs come from?Even the government needs to figure out how it will be paid back after the money has been spent. Smooth roads and freshly painted schools will generate ... what?
The key phrase in these quotes is this one: "they have never had practical business experience, such as lending their own money and surviving only if the money is paid back." There is a growing separation between policy makers and reality. The difference between previous generations of Americans and this one is a result of the growth of government. In the 1850s, for example, it was difficult to live your entire life as a part of the Federal government. The Federal government was too small to support a large swath of the population. Most representatives and academics had real world experience. Nowadays, we have a political class made up of people who don't know which end of a shovel to hold making policy about farming, roads and business.
No worries, though. That problem is self-correcting as we are seeing today.
I think that the problem is that the economists and the government *do* know what they are doing, but the are never going to *admit* what they are doing. Because what they are doing is pretty darned reprehensible. What I think is going on is this: they are getting ready to eliminate the extra debt through inflation. The "stimulus" will create inflation, making savings unattractive (because if you just try to save money and there is, oh, 5% inflation, you have to be getting >5% return just to break even. Might as well spend it, then!). This will drive money into circulation. It will also make it easier to pay off debt, because the money you are paying the debt with is worth less than the money you originally received when you took out the loan. So, basically inflation makes savings into a "use it or lose it" situation, and it makes long-term debt rot away to nothing, at the cost of the loan-holder. Meanwhile, as long as there is a graduated income tax, it amounts to a stealth tax increase.
ReplyDeleteI think we are in for a replay of the late 70s as far as inflation goes. Either the people in government are doing this out of stupidity, or have decided that this is what they want to happen (and are being veeeery careful not to admit it). More likely, a small number are doing it on purpose, by playing on the ignorance of the majority to get them to swallow the cover story and go along with it without realizing what they are doing.
And, if there is a small core of people doing this on purpose, they are neither Democrats or Republicans, and are adept at taking advantage of the love that both parties have for spending money that they don't have.
I don't know if the Democrats and RINOs are Evil, or Retarded, or Evil Retards.
ReplyDeleteBut I do know this...
I visited Peru in 1986 or 7, I forget which. At the time President Alan Garcia (who had a troubling political resemblance to POTUS) was leading the country. During my visit, inflation was well over 300%. Everyone defied the strict and punishing currency laws and exchanged sols for dollars on the street.
Unless you had dollars, you simply had to spend your money now, because tomorrow it would be worth nothing. This was devastating to the rural river people, who came to town to sell their produce every few months. Any money unspent became toilet paper.
People were forced to watch the exchange rate in real time. Your sols were worth less at dinnertime than they were at lunch. Jewelry stores didn't post prices, they had Troy scales. The jeweler would weigh a pair of earrings and then quote a price.
I use the Peruvian example to illustrate the power of Tim's point about debt and spending. Now look at this graph of the money supply. When this ominous increase in the money supply ignites inflation, and it eventually must (unless Barney Frank repeals the law of supply and demand), devaluation of the currency will basically trivialize debt and saving money will be impossible. As Tim notes, that's bad for you and good for the government given the current level of Treasury debt held by foreign governments.
I don't expect Peruvian or Zimbabwean rates of inflation, nor do I think there is a conspiracy. But I do recall being in the housing market when mortgages were 18% during the Stagflazoic Era when grinning peanutheads grew in the Rose Garden, billybeerazoids roamed the earth, and the Carteroid family invented the Misery Index. It wasn't fun then and it won't be fun when it comes back.