The political process destroys good economics. “Not on my watch” is a dangerous variant of Keyne’s “in the long run we are all dead.” Both approaches are responsible for the terminal state of world economies.
The Political-Economic Problem
The political charade regarding the budget-debt issues currently on-going in Washington is irrelevant to the real economic problem. The resolution of this sideshow has no bearing on a half-century of foolish economic policies that will doom the economy.
More stimulus cannot repair the economic problems. Nor can it solve an unbearable debt burden to which it has been the primary contributor. Einstein’s definition of insanity — doing more of what you know doesn’t work — comes to mind when listening to politicians discuss economic solutions.
The problem appears as an economic problem, but as most economic problems, its roots are political. Government has evolved into a Ponzi scheme dependent on two strategies. The first is spending ever more of other people’s money on themselves and toward their re-elections. The second is pretending what they do has no cost — to the productive, to the economy, etc.
“Manna-from-heaven” government is almost over. It has run out of resources, including its supply of smoke and mirrors. Nevertheless, government ways will not be abandoned willingly.
The Fed’s quantitative easing program is all that supports what is left of a dysfunctional economy. If the Fed stops, the hollowed-out economy will fail and a Great Depression will occur. Free market forces will excise a half-century of distortions and mis-allocated resources. This cleansing will be painful, undoubtedly made more so by a government continuing to intervene in an attempt to mitigate or manage events.
Most politicians don’t believe that such an economic event is possible. Many do not believe that it is unavoidable. Even those who understand do not want their names associated with Herbert Hoover and do not intend to let it occur on their watch.
The Federal Reserve is the only obstacle between us and the massive economic catharsis. Ironically, the Fed is also the prime cause we have reached this point. Think of the Fed as a drug dealer who provided the feel-good past at the expense of current and future health. The economic body is finally succumbing to its overdoses of the money drug.
QE will continue until it can’t (as Herb Stein observed of all unsustainable policies). Its continuation may put off the economic collapse for a while (that time period is indeterminable), but only at the cost of greater dislocation and pain.
Not On My Watch
The Fed and the political class will continue quantitative easing, playing for an economic miracle. But economics does not believe in or allow for miracles. However, political miracles are possible.
Stopping QE is an act of political suicide. Politicians and bureaucrats do not willingly give up their careers. Hence, all want to continue money creation despite the fact that the economy will be made worse off.
Money creation may create personal miracles. For a politician, a personal miracle is “not on my watch.” If something terrible happens and they are not in office, then they are not considered responsible. The amount of pain and harm done to society is a secondary consideration, behind the one concerning personal responsibility. “Not on my watch” is their guide to economic policy, not whether the policy is reasonable or not.
This behavior is another variant of Keyne’s clever retort to objections to his brand of economics — “In the long run we are all dead.” Economic policy focused on the short-run almost always produces disastrous long-run consequences. Our economy has outlived Keynes’ short-run and is dealing with the long-run consequences. Keynes is dead. We must pick up the pieces and put Humpty Dumpty back together again.
The world and the US will continue to deteriorate as the effects from the monetary “hits” lessen over time. Current levels of QE are more likely to be increased by the Fed than willingly decreased.
How Does This End?
As a wise doctor friend once observed, one way or another, all bleeding eventually stops. So too, will quantitative easing. It will likely stop when markets stop it.
Quantitative easing will end in one of two ways — a debt implosion that plunges the economy into Depression or a hyperinflationary blow-off which drives people to barter (and Depression). I suspect the latter, but political miscalculations could lead to the former even though that is what they most want to avoid.
Economic Armageddon will arrive. Only its route and timing are unpredictable.
In retrospect, 2008 will be seen as an understated trailer for the economic horror movie still in production.