Friday, February 27, 2009

Blind Men In A Dark Room

The latest from R.C.'s Exclusive Blogger, Chris Stockel...

Thoughts from the Right Side
Blind Men In A Dark Room
by R.C. Blogger Christian Stockel

President Obama’s first five weeks has included a poorly orchestrated and less than competent effort at addressing the principal issue for which he was elected to address. In fact, President Obama’s approach has been to outsource the whole affair to Nancy Pelosi and Harry Reid and play the role of pitch-man for a legislative monstrosity. Apparently, the only requirements President Obama provided to Congress could be framed in the phrase – “make it big and make it quick”. In fact, the whole approach outlined by President Obama and the Democrats in Congress is to jolt demand so that the U.S. does not enter a ‘lost decade’ like Japan did in the 1990’s. The mammoth economic stimulus package has been followed up with a $275 billion mortgage assistance program, and a $410 billion budget Omnibus bill. We are only in the fifth week of an Obama administration. Unfortunately, Obama and Congress are ignoring the lessons learned from Japan’s experience in the 1990’s and are jeopardizing America’s financial future in the process.

The American people expected that President Obama would come to the White House with a plan in hand (as he repeatedly said his team was preparing since his election victory) crafted with specific, targeted, and effective plans to address the core economic problems facing the nation. Instead, Obama’s promised change took the form of spending bills no different from the pork laden bills passed in Congress’ past. In addition, these bills include hidden foundations for an aggressive expansion of the federal government into healthcare, education, and energy. The American people voted for a brand new type of politics, a cool image, and an idea that was neatly packaged and delivered by an adoring media. Instead, they got Harry Reid and Nancy Pelosi. The term ‘buyer’s remorse’ does not do the situation justice. When asked to defend the particulars of the Congressional stimulus plan, the only defense Obama could provide was that “stimulus is spending – what else could you expect?”

Painful Facts
The unfortunate truth is that no amount of spending, tax cuts, or any combination of the two can get us out of this mess quickly or painlessly. Our current economic situation is the not the result of Bush tax cuts or even a failure of capitalism. It is the result of over 15 years of lax monetary policy, here and abroad, and reckless fiscal policies that has resulted in an over exposure to real estate investments in the U.S., shoddy loans to corporations in the EU, and over extension of consumer credit in the UK. The broad spectrum of poor asset quality on bank balance sheets and the overhang of corporate and personal debt have set off a deflationary cycle across all of the major economies resulting in slowing or declining economic growth. It is the price to be paid for individuals, companies, and governments living beyond their means. There is no sound logic that supports a stimulus program relying on the very fiscal and monetary policies that got us into trouble in the first place. The sheer scale of the financial crisis precludes any effective Keynesian policy coming out of Washington.

Japan’s lost decade was a single country’s experience with deflation in the midst of a global economy that was expanding at a fairly torrid pace. Japan issued multiple stimulus plans similar to the ones we are proposing now – roads, infrastructure, studies, industrial plans, etc. The result was unneeded roads and “bridges to nowhere”. Japan’s stimulus programs during the 1990’s were very large, quadrupled Japan’s national debt, and yielded little to no results. If the United States were to enact programs of a similar scope – we would have to spend $19 trillion – an amount that makes the current stimulus package seem paltry. So, what makes the administration think this bill – as ill formed as it is – will work? Recent historical precedence indicates it will do nothing except add to our national debt and risk future potential growth. It also ignores the dire situation our largest trading partners are experiencing.

The Scope of this Problem Precludes Any Quick Fix
The situation facing the United States and the western world is larger in both depth and scope than what Japan experienced in the 1990's. Japan could leverage world wide economic growth to help inflate its economy. Unfortunately, the United States is only one of many countries facing a shaky banking system, frozen credit markets, and decreasing demand. The EU has a reported $16 trillion in toxic loans sitting in its bank’s balance sheets approaching almost 95% of the EU GDP – and this does not include government or consumer debt. There are signs of weakening demand in the EU zone and a large financial meltdown in the UK. In fact, personal credit card debt in the UK exceeds its annual GDP. China is also impacted since its primary export markets are all in the same boat. China can look to internal demand for its primary industries, but even astronomical growth in Chinese demand cannot reverse the inertia in the broader global economy. A large number of the largest corporations in Europe have loans that cannot be paid because of falling demand for goods and services. Japan is also starting to re-experience what it had in the 1990's. More importantly, the EU and Japan are in the throws of an extreme demographic decline. They are both aging rapidly and having fewer and fewer children. In the long run, the EU and Japan will not have any large body of consumers buying or producing goods or services. So where in the world is there enough pending demand to reverse this current cycle of deflation? There is none.

Doing Nothing is An Option
The Obama administration is throwing old thinking at a new and unprecedented problem. A world-wide deflationary cycle with structural problems in major trading partners that point towards a long term economic slow down. The President explains that the current situation requires swift, immediate, and substantial action. According to him, doing nothing is not an option. Well actually it is an option and it is the only feasible option for the U.S. government to pursue. There is no stimulus package that the U.S. Congress can craft – regardless of content – that will be sufficient to counter-act the inertia in the world economy. Some will counter-argue that doing “something” is better than nothing. This argument ignores the fact spending all this borrowed and/or printed money in a vain effort to counteract worldwide economic trends will have real and substantial negative impacts on the long term prospects of the American economy that will greatly outweigh any short term benefits. It also ignores a simple fact that President Obama, Democrats, and liberals have never been able to accept. The government does not control the economy. It is merely one of many actors in the economy and is still subject to the same laws of economics that govern every business, household, and individual. It has size and the ability to print money on its side, but over time economic constraints and reality will impose themselves on the government’s capacity to impact the economy.

The U.S. government, the EU, the UK, and even Japan has increased borrowing and spending to stimulate their economies, support failing banks, and aid hurting industries. This constant flow of currency and bonds into the market will result in a flight of capital from monetary assets damaging the value of fiat currencies. Investors and institutions will move wealth to hard assets like gold, silver, copper, metals and other commodities. The result will be sudden inflation. However, it will not be demand-pull inflation, but monetary inflation. We will revisit the stagflation of the late 1970's as the major currencies drop in value and the price of gold, silver, metals, oil, etc go up and people's wages stay the same. We could quickly face a situation that makes our current one look mild. More importantly, the damage done to the world economy by out of control spending and a relentless growth of government will take at least a generation to reverse. The social impact on our Republic will be more profound than the financial impact. We have reference within American history that can provide an idea of the dangerous territory we are entering.

As counter-intuitive as it may seem, the federal government should let the markets work through this recession. Poor performing companies need to go through bankruptcy and restructuring. People who over-extended themselves should face foreclosure and learn how to rent. Congress and the Administration should look to securing the value of our currency, cut back on government spending, address regulatory failings that contributed to this crisis, and improve the condition of the nation's public finances. More importantly, President Obama should stop handing out candy to his political constituents and speak plainly to the American people as if we were adults. Explain to them that we are paying the price of financial and fiscal profligacy at all levels of our society. The United States, and the rest of the west for that matter, has been living beyond its means for two to three generations. He can offer real hope by implementing real and constructive solutions that while painful in the short term – will lead to real long term stability, growth, and prosperity. It will also go a long way to reversing the growing mentality of entitlement that has taken hold of the American people. As a free people, we should be looking to friends, family, and community to address the challenges in our lives – not look to the government.

I am not holding my breath.


Anonymous said...

Absolutely spot on! Obama will be bankrupting the country before his term end.

Anonymous said...

The sad thing is most of the people have been fooled into believing the financial crisis was caused by free markets run amok or George Bush.

You are right this is the day of reckoning for 15 years of easy money.

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