In the Weekly Standard, Irwin M. Stelzer provided his opinion on the range of likely economic outcomes which he characterized as “gloomy, gloomier, and gloomiest.”
Optimists likely dismiss Mr. Stelzer’s taxonomy as overly pessimistic. Pessimists likely accept his alternatives. Some consider him optimistic.
Of the three scenarios painted by Mr. Stelzer, the following comes closest to describing my version of current reality:
… those who are waiting for the Fed cavalry to ride over the hill and rescue the economy are doomed to disappointment. They say that if the Fed adopts an idea reportedly suggested by the Bank of England – make cheap credit available to banks to lend to businesses and consumers – it will be wasting its time and balance sheet. The banks are awash in loanable funds, businesses are cash-rich and opportunity-poor, and interest rates are already so low that lower still will not attract borrowing. As the Manhattan Institute’s Diana Furchtgott-Roth points out in RealClearMarkets.com, “More liquidity is unlikely to impart more impetus to the sluggish economy…. Congress and the president should not count on the Fed to bail them out of their mistakes…. Central banks are unable to help in the face of persistently flawed economic policies.”
This description is realistic as an economic assessment, although it is hardly what Stelzer calls the “gloomiest” scenario possible. There are worse scenarios imaginable and even likely. The fact that central banks are “unable to help in the face of persistently flawed economic policies” does not mean they won’t try. They are unlikely to stand aside and watch economies crumble.
Their involvement will not solve anything, but will make matters worse. Zerohedge has captured the alternatives:
… unless we see/hear believe that the Fed will embark on perpetual and exponentially growing QE since its impact is lesser and lesser, then its game over for the equity market – and if they ‘hint’ at open-ended easing than Gold goes sky-bound…
Temporary financial market responses occurred to such efforts, but no effects were achieved in the real economy. The US economy is spent, exhausted and crippled, at least with respect to what government can do.
Monetary stimulus is akin to a defibrillator. It temporarily shocks financial markets back to life, although does not address the underlying disease. The real economy — jobs and business investment — are unresponsive. Ultimately, financial markets will become immune to such shocks as well.
The game of extend and pretend has about played itself out. “Smoke and mirrors” was never an economic strategy. Now it has almost exhausted whatever political value it once had.
The underlying horror of our economic situation is not the unresponsiveness of the economy. An argument can be made that stimulus has never worked, even when it appeared to. The true horror is the size of government and what this size means to the economy. Mr Stelzer recognized this concern, although did not directly include it in his “gloomiest” scenario, but did discuss it as an afterthought:
If all of this does not cause you to enlist in the ranks of the gloomiest, consider the set of data compiled by Nicholas Eberstadt, political economist and demographer at the American Enterprise Institute, and published under the title, “A Nation of Takers.” Government transfers resulting from some 50 benefit programs – money taken from some taxpayers and redistributed to others – continue to grow at an exponential rate, and twice as fast as per capita income. Between 1969 and 2009 these transfer payments have risen from 7.8 percent of personal income to 17.6 percent. Most significant, Eberstadt shows that almost half of all Americans live in households receiving some government benefits. It is not unrealistic to expect this fact to affect votes in November, and to create an atmosphere favorable to President Obama’s goal of making our country more like European social democracies, should he be given the opportunity.
The above paragraph is the key to understanding the true economic problem. The makers (the productive sector) are shrinking while the takers (the entitlement class) are expanding. Fewer people are being asked to support more free-riders. No economy can continue to grow when this ratio goes beyond some extreme. Performance for the last five years suggests we are near that point.
The entitlement problem is not solvable within the political environment because voters are too conditioned to their “freebies.” Both political parties consider this bribery for votes as an important strategy in getting elected/re-elected. No politician has the courage to commit political suicide by trying to end this burgeoning scam.
The problem has reached a critical stage. Even at current levels it is beyond the sustainable level. The economy is unable to grow fast enough to satisfy existing promises and debt obligations. Those living at the expense of others will likely continue to grow. This doesn’t alter the destination of an economic collapse, but it speeds up the arrival.
No economy can support large numbers of unproductive. At some point those producing are unable to support both themselves and the free-riders. This prospect is the universal flaw in all socialistic schemes. Socialism continues until the “free-riders” destroy the producers, which reveals the bankruptcy of the ideology and bankrupts the entire economic system.