The Centre Cannot Hold - By Michael Lewitt
Years of misguided fiscal and monetary policies led to the 2008 financial crisis. Now a refusal to shed these discredited policies and embrace creative and politically bold solutions is keeping our economy mired in high levels of structural unemployment and below-trend growth. In addition to the bugaboos of efficient markets and investor rationality that have led policymakers and investors astray for so many years, we can add a misguided faith in Keynesian solutions to debt crises, a near-religious belief that mild deflation must be avoided at all costs, and uninformed media hype about the alleged benefits of mergers and acquisitions to the list of bad ideas that continue to lead economic policy and markets astray. As David Rosenberg, who has been far more prescient than most about the direction of the economy in recent years, has written, those who missed the current economic relapse “live in the ‘old paradigm’ world of recoveries occurring in the context of a secular credit expansion and they have not updated their models to the realities of a secular credit contraction.”
The evidence is clear that normal monetary and fiscal transmission mechanisms have broken down. And it is not simply a matter of poor execution, although the stimulus bills and mortgage remediation plans promulgated by the government were hardly paragons of efficiency or efficacy. It appears that the U.S. and global economies have reached the tipping point beyond which the majority of money creation takes place outside the control of governments and central banks. This condition should not apply in a true crisis situation in which non-governmental actors pull in their horns and government agents are empowered by panicked politicians to pull out all of the stops and literally flood the financial system with funds. In non-crisis times, however, the market should be willing and able to fund itself.
Unfortunately, due to the failure of policymakers to adopt the proper policies to stimulate growth (as well as the noxious anti-growth rhetoric and legislation promoted by the Obama administration), non-governmental economic actors (i.e. corporations and consumers) are again refusing to spend. As a result, the system has been seized by a massive paradox of thrift that is more akin to what one would expect in a crisis or near-crisis scenario. Policymakers learned the wrong lesson from Keynes. Rather than continued debt-financed government spending, they should have focused on this paradox of thrift that arises when corporations and businesses lose faith in leadership. Trying to cure a debt crisis with mountains of debt that will ultimately have to monetized is enough to make anybody stuff their cash in the mattress and start building bunkers in their back yards.
Comparisons with the Great Depression are useful as far as they go, but they may not go as far as necessary to get us out of our current morass. The 21st century world and its economies are profoundly different from the early 20th century one that suffered a calamitous economic collapse. For one thing, there were leaders that people believed in; perhaps new ones will emerge now to replace the imposters who are currently in office. But the key to studying history’s lessons is not simply looking for similarities between the past and present, but drawing the proper distinctions that can lead mankind to improve his current course of action. The current approach to solving our economic ills has been driven by a near religious fear of even mild deflation, and has taken the form of a purely Keynesian brew of government spending and artificially low interest rates that penalize savers. While Keynesian stimulus was needed at the height of the crisis, maintaining this approach once markets and the economy have stabilized is a recipe for years of below trend growth and extension of the boom and bust cycle that has characterized the last three decades of the U.S. economy. The Obama administration’s economic team learned the wrong lessons from Keynes and from history.
- Is Monetary Policy A Science? - The Interaction Of Theory And Practice Over The Last 50 Years – By William R. White
And in case you missed the two quotes from White that I posted on Twitter last night as I was listening to his McAlvany podcast (these were in regards to economic modeling and the desire to try and control the economy through monetary policy): "I'm...
- Hussman Weekly Market Comment: No Such Thing As Risk?
The enthusiasm of investors about central-bank interventions has reached a pitch that is already well-reflected in market prices, and a level of confidence that with little doubt, investors will ultimately regret. In the face of this enthusiasm, one almost...
- Bridgewater Takes Grim View Of 2012
Bridgewater Associates has made big money for investors in recent years by staying bearish on much of the global economy. As the new year rings in, the hedge fund firm has no plans to change that gloomy view. Robert Prince, co-chief investment officer...
- Hoisington Q2 Letter
The three competing theories for economic contractions are: 1) the Keynesian, 2) the Friedmanite, and 3) the Fisherian. The Keynesian view is that normal economic contractions are caused by an insufficiency of aggregate demand (or total spending). This...
- Welcome To The Keynesian Nightmare - Annaly Capital Management
British economist John Maynard Keynes was an advisor to the American government in the 1930s when it was struggling to restart the domestic economy. The Depression was tragic but, to put it in historical context, Keynes and his client were dealing with...