January 11, 2011
Forget about Economic Recovery in 2011By Monty Pelerin
The new year unfailingly raises spirits, even for those who don't imbibe. It represents a clean slate, a new start, and a time to make resolutions to improve ourselves and our lives. It is a time for renewal.
Economists and politicians are not immune to optimism. Many economists project wonderful things for the coming year. Likewise, Republican political pundits are especially ebullient, anticipating major political changes. Unfortunately, these expectations are no more realistic than our personal resolutions, and they have similar shelf-lives.
The year 2011 begins with the government-driven mantra that a recovery is under way. "The Recovery Summer" was accompanied by similar fanfare, only to become the subject of late-night TV jokes. The 2011 recovery meme will be as valid and fleeting as that of its predecessor.
Why the optimism? The government has not changed course. Its previous "solutions" have been ineffective and have exacerbated problems. Just as you cannot cure a hangover by drinking more, you cannot cure a debt problem with more debt. Both forms of temporary relief risk irreparable long-term damage.
A year ago, I predicted that there would be no recovery and that the seriousness of our economic plight would become apparent: "The year 2010 is likely to be the pivotal year where pundits stop referring to the recession and begin openly talking about a Depression."
No recovery occurred, despite claims by the NBER that the recession ended in June 2010. Nor will 2011 see any recovery.
In my opinion, we are in the beginning stages of an unavoidable Great Depression. Recognition is not widespread because of the concerted attempt by government and its media allies to minimize problems. The recovery propaganda machine is incessant, powerful, and committed. Nevertheless, understanding is growing that something bigger, more destructive, and longer-lasting than the typical recession is upon us.
The unsustainable debt piled up over the last thirty years continues to grow exponentially. Deficits are so large that they force the Fed to utilize Quantitative Easing. Last year, the Federal Reserve had these options:
It was easily predicted that the Fed would continue QE and that QE would not work:
The best that we can hope for is continued malaise. That probably means the following:
QE, at this point, has nothing to do with saving the economy. It is necessary to enable the government to continue paying its bills. It likely will be necessary beyond 2011.
The result of past and present government policies is that we are left with no good ending. For 2011, the best outcome is continued economic malaise. The worst outcome is the "crack-up boom" of which Ludwig von Mises warned:
I have speculated that this ultimate ending becomes a hyperinflationary depression:
This ending is not predicted for 2011, although it could begin tomorrow. Recent and continuing policies by government move us closer to Mises' outcome -- a devastation of the economy. When this ending comes, it will be typhoon-like, appearing suddenly and rapidly destroying everything.
The 2010 election changed the composition of Congress. That change raises hope that Congress will be able to dramatically reduce spending, possibly avoiding the tragic Misesian ending. This hope will soon be dashed.
Politicians are little more than frustrated actors -- too stupid for radio and too ugly for TV. They are not the country's "best and brightest," not courageous statesmen. The last act of political selflessness was George Washington refusing a kingship. Offer that today, and people would be trampled in the political stampede. You can count on two hands those who might decline the offer. You might need only two thumbs!
While voters recognize the unsustainability of our present course and demand cuts, it is a global demand. "Don't cut my programs; cut the other ones" is the local demand. This message is the one heard by vote-seeking politicians. The dichotomy between individual incentives and the interests of the country is described by public choice theory:
Socialist government grows by including virtually everyone as a beneficiary. Behind every dollar spent is a voter-beneficiary. Every dollar taken away harms the voter-beneficiary. Reversing the welfare state cannot occur without alienating constituents. It is for this reason that no political solution will be meaningful enough to avoid economic devastation. The cuts required are too massive.
Different noises will emanate from Washington, but little more. The newly elected Republicans will voice fiscal responsibility. The old bulls of both parties will defend (at least privately) the status quo. The battle will not divide along ideological lines, except for the extremes of both parties. Congress will produce cuts and compromises, accompanied by the usual political pomp and self-congratulations. Nothing done, however, will be meaningful enough to alter the path to destruction.
If you are an investor, go long on smoke, mirrors, and gimmicks. Political demand for these items will soar. Without courage, politicians have nothing left to convince people that things have really changed.
The required cuts are too massive for politicians to implement, and the economy cannot recover without them. Heavy and growing government spending and debt suck resources from the productive sector to support an insolvent government. Each passing day weakens the productive sector further.
The country has a destination-certain with a date-uncertain. It is akin to strolling down "The Green Mile" without knowing how close "Old Sparky" might be. Are we moving fast enough to get there in 2011? No one knows. Our best hope for 2011 is Japanese-style stagnation. Our worst is "Old Sparky."
Time is the enemy. Inaction and phony political solutions only move us farther down "The Green Mile." Feckless politicians, no matter how clever, will eventually encounter Stein's Law (named after economist Herb Stein): "That which cannot go on forever won't."
Then "Old Sparky" has us, and economic Armageddon occurs. As commented elsewhere, "[o]ne hopes that this tragedy unfolds fast enough that our freedom still remains. If so, we will rise from the ashes painfully but quickly. If not[,] the world may enter an Economic Dark Ages."
Pass the bottle; I'm going back to New Year's Eve.