Killing the Golden Goose

Economists constantly debate how far quantitative easing (QE) and money printing should go… how big our budget deficits can be… how heavy a debt load we should be allowed to carry.

However, many agree on one point: As long as such central bank and government activities don’t cause significant inflation, then there are little or no consequences… so why worry.

Really?!?

I’ll spare you a repeat of the expletives that fly across the room, wherever I am, when I hear that. That B.S. view simply shows that economists don’t understand our economy at all… or how it has created unprecedented wealth, especially in the past few centuries.

Just because the irrational approach to this natural downturn hasn’t caused hyperinflation… doesn’t mean there’s nothing to worry about. With the deflationary environment I’ve predicted for the last several years, inflation is the least of our worries.

Thankfully, not all economists are fools…

The more astute ones, like Ken Rogoff, worry that government debt levels will get so high they’ll weigh down the economy… that when interest rates ultimately return to more normal levels (in a more inflationary environment), many governments will see much, if not all, their revenues disappear into the interest-on-debt black hole.

That’s a valid, all-too-likely point. Just look at Japan. Now that Japan’s government debt is approaching 250% of GDP, a rise of long-term interest rates back to just 4% would cause its interest costs to roughly equal its tax revenues.

They’re right to worry. I worry about that inevitable outcome too.

But there is one outcome that most scares the crap out of me.

By governments preventing recessions, debt deleveraging, bank failures, and business failures through endless stimulus, they’re killing the very dynamics that drive “the invisible hand.”

That’s like biting the hand that feeds you… then killing the owner of said hand and feasting on the carcass. What do you do when there’s nothing but dry bones left and no one to feed you?

Or like eating bad sushi and then sealing up all your body’s holes so nothing can come out!

The greatest mistake and misunderstanding the great majority of economists make is to think the economy can become a “machine,” churning out constant 3% to 4% growth, limiting inflation to 1% to 2%, preventing recessions.

This involves such a misconception and disconnect from the real world that it’s unforgiveable. As Jim Cramer would say: “They know nothing!”

Yet, that’s exactly what central banks and governments the world over are trying to do: ensure constant, maximum growth and contain inflation. And they’re using irresponsible monetary and fiscal policy to achieve those goals. Worst of all, their methods are failing miserably.

The economy is an organism, like our bodies. It evolves through a constant interplay between opposite dynamics: growth and recession, inflation and deflation, innovation and creative destruction, success and failure.

Can your body stay awake and work constantly? Of course not. Sleep is a critical activity that optimizes the body’s functionality.

An economist would argue that sleep is a waste of time and productivity. They’d recommend a dose of speed or steroids to keep us awake and productive (which is exactly what the Fed is doing to the economy with QE).

How do you think that would work out? Ultimately, not well. It would last for several days, then you’d start to hallucinate, become paranoid, become careless, reckless and irrational. And not long after that you’d either die or collapse into a deep sleep.

For us, sleep is about restoration, re-balancing and purification, innovation and creative resolutions (working out things in dreams). For the economy, the winter economic season is equivalent to sleep.

Ultimately endless QE will just create an environment that functions on illusions. It will pervert the markets and empower speculation, which only leads to new bubbles that will inevitably burst… and the next thing you know, we’re back in a 2008-like crash, only now we’re too exhausted to do anything about it.

If economists keep pursuing policies of endless QE, then at best we end up in a coma economy, like Japan. At worst, we’ll end up creating a greater crisis down the road.

My money’s on the latter, likely starting in 2014.

Harry

 

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Categories: Economy

About Author

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.