It's All Coming Apart

Despite Government propaganda and manipulated statistics to the contrary, our economy continues to deteriorate.  For every "green shoot" highlighted by the Government and its lackey media, multiple contra-examples are cited by independent analysts.

To continue to deny reality risks credibility.  Perhaps that is why S&P, arguably a sock-puppet of Wall Street, on Monday made its announcement regarding the financial condition of the US.  As reported by the Wall Street Journal:

Standard & Poor's Ratings Services Inc. cut its outlook on the U.S. to negative, increasing the likelihood of a potential downgrade from its triple-A rating, as the path from large budget deficits and rising government debt remains unclear.

Fitch and Moody's have not yet seen fit to change their ratings.  Preservation of the little credibility the ratings agencies have left will force them to follow in the course of time.

The S&P judgment was as unexpected as a terminally-diagnosed patient finally reaching his final destination.  Reaction by the political class to the "death" is likely to be characterized by the Claude Rains gambit: "I'm shocked, shocked!"  How could anyone have seen this coming?  Actually, the only surprise is why S&P waited so long to report on the obvious and why it didn't also remove the Triple A credit-rating of US debt.  That downgrade of debt will follow eventually.  Apparently S&P doesn't want to pronounce a corpse dead until it is put into the ground.

Some believe the timing of the S&P announcement was related to the upcoming political battle over the US debt ceiling.  Monday's Dow was crashing, at one point down over 240 points.  If markets are so easily rattled, the thought is one must raise the debt ceiling.  Perhaps that played into the timing of the announcement, yet in a rational world this announcement should make it harder to raise the debt limit.  After all, it is debt that is causing the grief.  Why would more of it be considered prudent? 

Economic damage over the last several decades is structural, yet decision-makers continue to treat the problem as a normal, albeit severe, economic cycle.  The US economy and many other world economies are in a debt death spiral.  That is showing up in numerous places.  On Monday, yields on two-year Greek bonds exceeded 20%.  Greece and Ireland reiterated that they want no bailout.  Changes in the Finnish government may make it harder to push through a Portugal bailout.

European "bailouts" are charades of the first order.  They merely move problems from sick countries to healthy ones, jeopardizing the survival of the Eurozone.

Academic economists fiddle with models and assumptions, looking desperately for something that will enable them to rationalize the situation.  Ironically, it was John Maynard Keynes himself who said:

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.

The irony is that it is Keynes' ideas that are responsible for the economic mess.  He is the defunct economist he warned about.  The average man in the street understands clearly the problem -- It's the debt, Stupid!  He has an advantage over most economists who have been educated beyond their level of competence.

Academic economic nostrums are ill-equipped to deal with this problem.  Structural debt problems are not part of their model.  As a result Keynesians prescribe more spending (and more debt), further poisoning the economic patient.  These economic charlatans know no other medicine.

In the meantime we spiral downward as life slowly ebbs from the economy.  There is no way out except to recognize the level of debt is not supportable.  Excess debt must be liquidated in order for the economy to recover.  That requires pay-downs and defaults, not bailouts.  There will be lots and lots of defaults.  There is no other way.

Instead, the political class and their economic epigones insist on treating the problem as just another cyclical event.  Easy money, stimulus and all the other Keynesian nostrums are useless.  They are what brought us to this point.

Massive amounts of debt must be liquidated.  But confidence also must be restored.  Doug Casey characterizes our economic climate thusly:

We are in a financial no-man's land.  "Investing" is problematic because of a deteriorating economy, unpredictable and increasing regulation, rising interest rates and wildly fluctuating prices.

Mr. Casey's negatives are enough to stop business investing, hiring, and growth dead in their tracks.

Contrary to the way that economics is taught, there is no such thing as an economic machine where a "pump can be primed" or the economy can be "stimulated."  All there are millions of individuals all making decisions designed to enable them to navigate through life. For most, their primary objective is the financial and physical security of themselves and their families.  In scary economic times, these decisions are affected.

In order to right the economy, the fear and uncertainty imposed by existing and future government mandates and actions alluded to by Mr. Casey must be removed.  Doing so will not be easy, for more is in play than Mr. Casey's short quote suggests.  There are at least five considerations that should be of concern to all of us:

1. An Incompetent President - The President is inexperienced and incompetent.  He is likely a fraud, as evidenced by his guarded and unknown past.  He is incapable of leadership, honesty, or management.  Virtually every one of his policy initiatives has been harmful to the economy and country.  His intentions are clear; the degree to which he will be able to drive us further down the Road to Serfdom is not.

2. An Incompetent Political Class - The political class attained power via Santa Claus economics, providing gifts to constituents in return for votes.  Both parties are guilty.  Politicians have conditioned themselves and their constituents to "free-lunch" governance.  Few know how to govern in any other fashion.  Most are indistinguishable from prostitutes -- vote for me and I will do "that" for you.  Both parties want to preserve the welfare-warfare State, disagreeing merely on the means of doing so.

3. An Incorrect Paradigm - The Keynesian model of spend and spend has been good for politicians but disastrous for the economy.  Over time, it has encouraged loose credit, overspending, and living beyond our means.  The failures are obvious to all but Statists and so-called Keynesian economists.  The political class cannot stop "free lunches" without suffering severe political consequences.  Hence, the abuses will continue until resources are exhausted.  Like Rome of old, we will soon run out of bread and circuses.

4. An Unhappy Ending - Current economic problems cannot be mitigated or solved without incurring another Great Depression.  Whether it is preceded by a deflationary collapse or a hyperinflationary blow-off is moot.  The ending is inevitable and as more people understand this ending, they take more extreme steps to protect themselves -- spending ratchets back, savings increases, and businesses refuse to engage in new investment or hiring.

5. A Dangerous Prelude to the Ending - Government is insolvent.  It would be bankrupt without Federal Reserve Quantitative Easing.  As a cornered, wounded animal will do anything to survive, so will Government.  Does that mean confiscatory tax rates, capital controls, IRA investments forced into Treasury Bonds, "excess profits" taxes, a national sales tax, etc., etc.?  It could mean any or all of these and more.  Government will not roll over.  It will do whatever it can to continue, regardless of how illegal, immoral, unethical, or harmful it may be for the country.

John Maynard Keynes referred to "animal spirits."  Alan Greenspan used the term "irrational exuberance."  Both expressions acknowledged the importance of expectations and anticipations.  The five factors listed above are not universally known or accepted.  As they become more evident, the dismal level of animal spirits and exuberance will sink even lower.  There can be no recovery under such conditions.

The charade that government can solve this problem may continue for a while.  So might the notion that the government cannot go bankrupt.  Yet both beliefs are false and will be seen to be so.  Spending, hiring, and investment will be unresponsive to anything the government may or can do.

The myth of government is breaking down around the world.  For those with 20-20 vision, the Emperor is already seen sans clothes.

Monty Pelerin blogs at