Will Policy Makers
Turn A Global Economic Slowdown Into Economic Crisis?
Governments and central banks create a crisis
from a moderate and completely healthy slowdown by denying economic cycles and,
even worse, by…The recent macroeconomic data of the leading
economies point to a widespread slowdown. What is more concerning is not just a
logical moderation in the path of growth, but the acceleration in the weakening
of economies that were supposed to be stronger and healthier. It is even more
concerning that this aggressive worsening of key leading indicators in China,
the EU, and most emerging economies happens at the peak of the largest monetary
and fiscal stimulus in decades.
It is easy to blame
this widespread weakening on political headlines, trade wars, and — of course
—Trump, but it would be disingenuous to believe those are the real factors
behind the negative economic surprise.
The pace of global
recoveries since 1975 has been slower and weaker, consistently, according to
the OECD. Recoveries take longer and happen slower. At the same time, periods
of crisis are less aggressive albeit more frequent than prior to 1975.
Another interesting evidence of the crises and recoveries since 1975 is that
almost all economies end the recession period with more debt than before.
These factors are all
concerning, but the evidence also shows that economic progress has continued
regardless and that the main factors of wellbeing have improved dramatically. I
had the opportunity of meeting Johan Norberg, author of “Progress” and we
discussed all the positive elements we have seen in the past decades. In the
same period, from 1975 to 2018, extreme poverty has been reduced to all-time
lows. Hunger, poverty, illiteracy, child mortality… all those terrible
problems have been dramatically reduced to the lowest levels in history. That
is the positive.
However, recognizing
the positive is important, but ignoring the risks is dangerous. Global debt has
ballooned to all-time highs, more than three times the world GDP. For those
elements of progress to continue improving, we must stop the race of perverse
incentives created by the wrong analysis of the origin of crises and the
solutions that are often proposed in mainstream economics and politics. I
agree with Johan Norberg that the two main factors that have driven the
phenomenal progress we have seen are free markets and openness. The freedom to
innovate, experiment, create and share must come with the right incentives.
For decades,
governments and central banks have always identified the problems of the
economy as demand problems, even if it was not the case. If there was a crisis
or a recession, governments immediately believed that it must be due to lack of
demand, and subsequently decide that the private sector is not willing or able
to fulfill the real demand needs of the economy, even if there was no real
evidence that companies or citizens were investing or consuming less than what
they needed. The entire premise was that companies were not investing “enough”.
Compared to what and decide by whom? Obviously by central planners who benefit
from bubbles and overcapacity but never suffer the consequences.
Governments and
central banks never perceive risks of excess supply and even less predict a
bubble. Why? Because most central planners see debt, oversupply, and bubbles as
small collateral damages of a greater good: recover growth at any cost.
Behind the mistake in
diagnosis is the obsession to maintain or grow Gross Domestic Product (GDP) at
any cost. GDP is relatively easy to inflate. I always explain to my students
that GDP is the only economic calculation in which you add what you spend with
what you earn. GDP can be inflated through government spending and with higher
debt-fueled expenditures. Debt is not a problem when it serves its purpose,
which is to finance productive investment and allow the economy to grow, while
efficiency, innovation, and technology allow us to be more productive and
receive more and better goods and services at cheaper prices. It is a virtuous
cycle.
The virtuous cycle of
credit turns into a vicious cycle of unproductive debt when we incentivize
malinvestment and prevent technology substitution by implementing massive
government stimuli and liquidity injections.
Central banks justify
their actions saying they do not cut rates, it is a market and private sector
demand. Really? How and when did they survey that? What private sector? Crony
or obsolescent companies? Highly indebted ones? Furthermore, if low rates and
liquidity injections are a market demand, why not let the market set rates and
liquidity instead of central banks?
Those same governments
that feel the need to “increase inflation”, something that no consumer has
demanded ever anywhere, do so because they benefit as the first recipients of
newly created money and the only sector that truly benefits from inflation. Not
even crony sectors fully benefit from inflation, the tax of the poor. Those
suffer higher costs and import expenses.
By always making the
same diagnosis, mistakes are repeated and accumulated. No wonder the pace of
recoveries is slower, weaker and more indebted.
- First, governments believe the problem is lack of demand and
name themselves as the solution, using savers to finance it, via taxes and
inflation. The best way to boost GDP? Massive white elephants, enormous
infrastructure projects that generate a short-term boost to the spending
side of GDP. Infrastructure is needed, of course, but the difference is
when countries decide to use it as a subterfuge to disguise growth. Build
anything at any cost. This leaves behind massive debt and a less dynamic,
not stronger economy.
- Second, demand-side policies perpetuate those sectors
that are in process of obsolescence at the expense of savers, salaries and
productive sectors. Governments will always subsidize and support the
inefficient at the expense of the efficient because their objective is to
maintain what they believe works and keeps jobs. It is not due to bad
intentions or evil objectives, it is simply to perpetuate the past that
they live off.
- Third, massive liquidity injections and low rates are
exactly the equivalents of indirect subsidies to the inefficient. The
earliest recipients and most benefitted from “unconventional monetary
policies” will, by definition, be the most indebted and least productive.
This is why productivity growth and money velocity stall during periods of
government-led monetary and fiscal excess.
- Fourth, the benefits of the short and long-term credit
cycle are broken. Creative destruction is all but eliminated,
malinvestment is promoted via unsustainably low rates and liquidity is
absorbed by financial assets and unproductive sectors.
Inflation does not
rise as much as central planners want because technology and efficiency are
unstoppable even if they try, and because overcapacity is perpetuated through
constant re-financing. Massive liquidity and low rates make zombie companies
soar. The percentage of companies that cannot pay interest expenses with
operating profits balloons despite ultra-low rates and alleged
“growth-boosting” plans.
For decades,
demand-side policies showed diminishing but not lethal results, but now the
world has repeated the same policies so many times that there is simply
exhaustion. Rates are unsustainably low, liquidity is excessive and there is no
real fiscal space in governments that have all but consumed their ability to
extract wealth from savers.
The more we hear from
governments that we need to spend more and save less, the weaker the response
from economic agents.
Governments and
central banks create a crisis from a moderate and completely healthy slowdown
by denying economic cycles and, even worse, presenting themselves as the ones
that will revert them.
The current global
slowdown is not due to lack of stimuli, but the excess of them. When central
planners decide to “correct” it, they create the seeds of the crisis.
Malinvestment reaches unsustainable levels and bubbles burst, affecting all
aspects of the real economy.
There is no evidence
that companies or citizens are investing or consuming less than they need, it
only happens in the mind of those that expect excel-spreadsheet-style results
from demand-side policies in the real economy.
The global economy is
close to recession, but a full-blown crisis is still unlikely. If central banks
and governments present themselves, again, as the “solution,” they will create
the next crisis.
Government Economic Statistics – The
Bureaucrat’s Weapon
By adding a cup of water to a cup of milk, govt
claims to produce two cups of “milk”. Two cups of watery milk are not two cups
of milk…The government “shutdown” enters its second month.
But today we raise a
celebratory cheer…
A cheer for the
temporary unemployment of one subset of furloughed federal employees.
We refer to the
government statisticians who collect, sort, analyze, worry, torture and
weaponize economic data.
That is, those who
throw false weights upon the scales in support of government policy x or
government policy y.
For without statistics
the government is all thumbs, a plodding doofus… a fumbling cyclops speared
through its one and only eye.
This beast forms a
greatly reduced menace to American liberty.
Explains the late
libertarian economist Murray Rothbard (with a polite tip of the cap to
old Daily Reckoning hand Gary North):
Certainly, only by statistics, can the federal
government make even a fitful attempt to plan, regulate, control or reform
various industries — or impose central planning… on the entire economic system.
If the government received no railroad statistics, for example, how in the
world could it even start to regulate railroad rates, finances and other
affairs? How could the government impose price controls if it didn’t even know
what goods have been sold on the market, and what prices were prevailing?
More:
Statistics… are the eyes and ears of the
interventionists: of the intellectual reformer, the politician and the
government bureaucrat. Cut off those eyes and ears, destroy those crucial
guidelines to knowledge and the whole threat of government intervention is
almost completely eliminated.
That is, without
statistics the government could not “govern” us as it would.
And to be governed,
noted 19th-century philosopher Pierre-Joseph Proudhon:
Is to be watched, inspected, spied upon,
directed, law-driven, numbered, regulated, enrolled, indoctrinated, preached
at, controlled, checked, estimated, valued, censured, commanded… registered,
counted, taxed, stamped, measured, numbered, assessed, licensed, authorized,
admonished, prevented, forbidden, reformed, corrected, punished… drilled,
fleeced, exploited, monopolized, extorted from, squeezed, hoaxed, robbed…
repressed, fined, vilified, harassed, hunted down, abused, clubbed, disarmed,
bound, choked, imprisoned, judged, condemned, shot, deported, sacrificed, sold,
betrayed; and to crown all, mocked, ridiculed, derided, outraged,
dishonored.
We might file
additional torts… but we operate on a strict word count.
And the federal
government presently lacks an entire bucketful of data to govern us…
MarketWatch reports
the current cataclysm may delay the following economic reports:
Durable goods orders
(Jan. 25)… core capital equipment orders (Jan. 25)… new home sales (Jan. 25)…
advance trade in goods (Jan. 29)… housing vacancies (Jan. 29)… gross domestic
product (Jan. 30)… personal income (Jan. 31)… core inflation (Jan. 31)…
construction spending (Feb. 1).
We prefer to be
uninformed rather than misinformed.
We therefore relish
the prospect of going uninformed about the latest GDP numbers, for instance.
Government at all
levels is credited with a thumping 36% of U.S. GDP spending.
But assume the
government pays a fellow to dig a hole. Assume further it pays him to refill
it.
By the official
telling, you have just witnessed an increase to the gross domestic product.
Imagine further that
the charade was financed through debt.
In its GDP
calculations, the Bureau of Economic Analysis suggests debt-financed government
spending adds authentic oomph to the economy.
But financial advisory
firm Baker & Co. says money government borrows must eventually be repaid.
Thus, it is not
income. It is “artificial stimulus.”
Subtract the
artificial stimulus, Baker argues… and real GDP has declined an average 7.45%
each year since 2007.
On a similar note…
A fellow by the name
of John Williams captains the website ShadowStats.
His stated purpose is
to expose and analyze “flaws in current U.S. government economic data and
reporting.”
The government adds a
cup of water to a cup of milk, for example. Thus may it claim to produce two
cups of “milk.”
Williams penetrates
the shim-sham — two cups of watery milk is not two cups of whole milk.
Here is how official
GDP stands against ShadowStats’:
Revealed is a roughly
4% difference.
Which data do you
believe?
Redirect your
attention to the inflation rate…
Last year the official
consumer price index (CPI) indicated a 2.44% rate of inflation.
But if you measure
inflation as the government measured inflation in 1980… a different sketch
emerges.
By the standards of
1980, CPI increased not 2.44% last year, says ShadowStats — but 9.6%:
Go here should you seek additional light about ShadowStats.
Again, which do you
believe?
Perhaps ShadowStats
stretches the figures some. No cloak of infallibility surrounds it.
They nonetheless
perform a capital service in our estimate:
Exposing the
government’s statistical myths.
So today we hoist the
black flag of anarchy… and raise three cheers for our liberation from the
government statistician, however temporary.
“The only good
bureaucrat is one with a pistol at his head,” said the irreplaceable Mencken.
We would add but one
detail:
Be sure it’s loaded…
Trump Administration Warns Economy May Not
Grow At All In 1st Quarter Of 2019
The shutdown is really starting to take a toll
on the economy, and the Trump Administration is beginning to quantify that
toll. Here are the details…This government shutdown is
really starting to take a toll on the U.S. economy. On Wednesday, the
chair of the White House Council of Economic Advisers made an absolutely
stunning admission. We all knew that the global economy was slowing down, and
we all knew that U.S. economic activity was beginning to sputter, but
up until this week the Trump administration had always insisted that we are not
heading for a recession. Well, all of that changed on Wednesday when
Kevin Hassett publicly admitted that we could end up with zero
GDP growth during the first quarter of 2019…
A top economic adviser
to President Donald Trump told CNN on Wednesday that the US economy may show no
growth in the first quarter if the federal government shutdown lasts much
longer.
White House Council of Economic Advisers
Chairman Kevin Hassett said in an interview with CNN’s Poppy Harlow that he was
not overly worried about the long-term effects of a government shutdown. But
after Harlow asked him if the United States could wind up with zero GDP growth
this quarter, he conceded that it was possible. “We could, yes,” he said.
With much of the
government currently closed, and with no end to the shutdown in sight, it is
inevitable that the economic numbers for the first quarter are not going to
look as good as they could have been.
But if this shutdown
lasts for the entire quarter, that could easily push us into an economic
contraction, and that would send shockwaves all over the planet.
And at this point
there is definitely a possibility that this shutdown could go on for a couple
more months. Neither side intends to give in, and things are starting to
get very personal. On Wednesday, Nancy Pelosi made it exceedingly clear
that she will not allow President Trump to deliver the State of the Union
address at the U.S. Capitol until the shutdown ends under any circumstances…
House Speaker Nancy
Pelosi dug in Wednesday on her call to delay the State of the Union address even after President Trump vowed to proceed with
the speech next week, sending a curt letter making clear she will not allow the
event to take place during the government shutdown.
Reacting to Pelosi’s letter, Trump told
reporters at the White House “we’ll do something in the alternative,”
suggesting a speech of some kind will still happen next week.
This truly is
unprecedented.
Donald Trump is the
very first president in all of U.S. history to be “disinvited” from delivering
the State of the Union address.
And the hundreds of
thousands of federal workers that are not receiving paychecks right now are
really starting to get restless. A lot of them have been living paycheck
to paycheck, and so missing a couple of paychecks is a really, really big deal
to those people. As Marketwatch recently noted, some of them are
actually “turning to food banks to feed their families”…
Within just a few weeks into the government
shutdown, people are struggling to cope. We hear stories about people turning
to food banks to feed their families. We hear stories about people who are in
dire straits because they can’t get loans. We hear stories about people who
can’t pay their mortgages. That’s not even one month into the shutdown.
If something this
minor can cause such widespread pain and suffering, what would we see if a real
crisis actually hit this nation?
Of course the truth is
that most Americans are simply not
prepared to handle much
of anything, and this is a point that Mac Slavo made quite well in one of his most recent articles…
Almost 60% of Americans have less than $1000
in savings for a rainy day fund or an immediate emergency. It’s been ten years
since the Great Recession left many Americans jobless with no money, and it
appears most have learned nothing. The government shutdown serves as a
painful warning and preview for what will happen once
unemployment rises from 50-year lows. Americans are far too dependent on others, including the
government, for their survival.
For now, many that are
struggling financially due to this shutdown are trying to bridge the gap by
going into more debt.
And if the shutdown
doesn’t last too much longer, that might work for a lot of people.
But it is very
dangerous to go into too much debt, and a large portion of the country has
already crossed that line. For example, one recent survey discovered that
approximately a third of all Americans are “afraid they’ll max
out their credit card when making a large purchase”…
To that point, more than 1 in 3 people —or 86
million Americans — said they’re afraid they’ll max out their credit card when
making a large purchase, according to a new WalletHub
credit cards survey. (Most of those
polled considered a large purchase as anything over $100.)
The only easy way out
of this government shutdown would be for one of the two sides to completely
fold, and that would be politically disastrous for whoever decides to do that.
The battle lines have
been drawn, and this political game of chicken is going to go on until somebody
blinks.
And if nobody blinks
for a couple more months, the economic consequences of this government shutdown
are likely to be quite severe.
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