Despite all the media hoopla and propaganda regarding how well the recovery is progressing, there is little reason for optimism. Most of the claimed improvements do not hold up beyond the deliberately misleading headlines. This is especially true of claims pertaining to economic growth, employment or the European problems.
The US marches inexorably toward its fate with sovereign bankruptcy, continuing to spend and borrow as if a bottomless pit of funds will continue to be available forever. In a misguided effort to stimulate the economy, the current president has added about $4 Trillion of new debt to debt levels that were already dangerously high. Much of the new debt has been financed by the Federal Reserve via the creation of new money and credit.
The unprecedented use of the Fed (money printing) has been required in this debt expansion for two principle reasons:
- Foreigners and US citizens are unwilling to supply enough funds to cover our profligate government spending.
- Interest rates are being deliberately driven close to zero as a result of Fed purchases of US debt. This policy is an attempt to re-liquify the banking sector.
The cliche is “don’t fight the Fed;” there is no need to “fight the Fed” because they’re busy self-destructing, and all we have to do is watch.
Maybe the market will follow Apple in a trajectory to the moon here. If it doesn’t, a variety of other models suggests the wheels may fall off the “growth and rising profits forever” story and the market will decline to test recent lows or even hit new lows.
That’s not what the Fed or the politicos want, but events on stage may be slipping beyond their off-stage control.
The fact that this is an election year means a further ratcheting up of debt and manipulated data. Incumbents control the levers of government and always pull these levers in a manner that will maximize their chances of re-election. This behavior is part of the DNA of the modern political animal. What is missing is any commitment to country or truth.
The economy will not slow down for lack of government stimulus and more duplicity. The issue is whether the patient can survive more such treatment.
What differs this year is that we are close to a complete and total economic collapse, perhaps too close to survive the political shenanigans of an election year. Political abuse of the productive sector has been ongoing for decades. There are limits to what can be absorbed, although no way to determine what these are. Wherever the tipping point, we are closer to it than ever before.
The productive sector has never been smaller on a relative basis. The “takers” (i.e., those taking from producers) has never been larger. About 50% of the population receive some or all of their income from government. But government has no money other than what it takes from the productive sector. As many people are riding in the wagon as are pulling the wagon. This trend is accelerating at a frightening rate.
Ayn Rand used the analogy of Atlas shrugging to describe how an economy dies. Her analogy was imperfect in the sense that it suggested Atlas with a binary choice of working or not. A more realistic analogy, although less colorful, is the notion of millions of Atlases faced with the choices Rand saw confronting her Atlas. Atlas doesn’t shrug in the sense that Rand imagined; Atlas shrinks.
Atlas shrinking explains what happened to our labor force and manufacturing industry. As the rewards for work or effort declined, fewer individuals exerted themselves. Likewise as the reward to capital diminished, capital was either withheld or went to areas where it was treated more favorably. Outsourcing, globalization and similar terms are easily explained in terms of “Atlas shrinking.”
The workings of the market economy have been damaged and continue to be attacked. Distortions and mis-allocations grew as government meddling increased. Attempts to remedy or cover up the reality of what was happening have only made matters worse. Tragically, the resources commandeered by government have been devastating to the productive sector. Still worse, most of these resources have been squandered.
“Stealing” these resources from the productive sector weakened this sector. Capital and wealth were destroyed. Instead of going into productive uses, these resources were used to expand consumption and pursue unproductive follies like green energy, the Chevy Volt and “saving” companies and cronies who should have been allowed to meet their deserved fate.
As a result we have an economy filled with zombie industries and companies who live as wards of the State. The massive misuse of resources leaves the productive sector and productive companies with less capital. Capital (physical capital not money) is the only source for improving living standards and wealth creation.
The government diminished the pool of capital available to society. As a result, living standards are dropping as are growth rates. We are getting poorer and there is not a damn thing that government can do to prevent this. Trying will only make matters worse.
Real capital is what separated us from the rest of the world. It is what made us the envy of others and produced our high standard of living. It is impossible to have over-sized government without lowering growth and standards of living. For some, that is an acceptable trade-off. For too many who argue for more government, they don’t even understand the trade-offs.
Debt levels (around the world) will end the last three decades of economic charade. Our economy and others will be exposed as mostly “smoke and mirrors.” The Federal Reserve cannot engineer a recovery. The best they can do is keep the US government from defaulting for a while longer. But the Fed cannot do so without debauching the currency.
There is no way this ends well. The system is unstable and about to collapse. Don’t be surprised when it does.