Last Thursday the DOW surpassed 17,000 for the first time ever. What a marvelous achievement. The combined forces of mass money creation and speculative fervor have bid up the market to levels a person of sound mind and honest intentions never thought possible.
According to the Bank for International Settlement, in its recently released Annual Report, “financial markets are euphoric.” The BIS also recommends that central banks begin raising interest rates while economies are growing so they can be prepared for the next recession. Jim Edwards at the Business Insider has the particulars…
“The subtext (and not so subtext) of BIS’s annual report is that, because many central banks have reduced interest rates to zero — the U.S. and Japan included — they are without weapons to boost the economy should another crisis hit. You can’t go lower than zero, basically.
“These words from the BIS ought to terrify anyone who thought central banks were unprepared for the last recession in 2007, when U.S. interest rates were ‘high’ at about 5.3 percent.”
Obviously, there will be another recession. In fact, we could already be in one. Because the Fed and other central banks have continued their extreme monetary policy they will be out of bullets when the next recession hits.
Spending and Debt vs. Savings and Investment
Perhaps the Fed will do what the European Central Bank just did. Maybe they’ll institute negative interest rates. To do so, banks would be charged for keeping excess funds…funds above what are needed to meet mandatory reserve requirements. Depositors, instead of receiving interest, may also be charged for keeping deposits in the bank.
This sounds crazy, we know. But the rationale is that negative interest rates will encourage banks to loan out more money and depositors to spend rather than save. To the experts at the Federal Reserve more borrowing and more spending would boost demand, spur growth, and create jobs. This notion is madness.
Real long-term sustainable economic health is achieved with increased savings and investment. Not increased debt. Pumping up GDP by pumping up consumer debt represents a kind of phony growth stimulated by drawing down capital and burning up wealth.
On the fiscal side, the federal government continues to spend much more than it taxes. The budget deficit for the current fiscal year is projected to be $492 billion. While this is far less than the trillion dollar plus deficits racked up between 2009 and 2012 it is still an unsustainable rate of debt accumulation.
As you know, each year’s budget deficit gets added on to the overall national debt. Currently, the national debt has been run up to over $17.5 trillion. This is supported by a $16.8 trillion gross domestic product. In other words, debt is in excess of 100 percent of GDP.
The reason we’re providing this review of deficits and debt is because over the weekend we came across a The Week article by Ryan Cooper that is so idiotic and of such gross falsity we must shine the light on it and offer some clarity. What follows is an excerpt of the nonsense. The first two sentences are accurate…after that it quickly spins out of orbit…
An Absolute Disaster?
“Ever since 2009, when the recession and the stimulus package pushed the annual budget deficit to a peak of nearly $1.5 trillion, it has been falling steadily. Last year it came in at $680 billion; this year it is projected to total $492 billion.
“This is an absolute disaster,” devolves Cooper into the ridiculous. “It is President Obama’s single greatest failure, representing the fact that he, and the rest of the American government, did not adequately respond to the Great Recession. It means that millions of Americans were kept out of work, that trillions in potential output was flushed down the toilet, and that the American economy was very seriously damaged, probably permanently, for no reason at all.”
Here at the Economic Prism we can think of many of the Obama Presidency’s failings. However, cutting the budget deficit from nearly $1.5 trillion to $492 billion isn’t one of them…except for the fact the deficit should have been further reduced and the budget balanced. Spending in Washington continues to be totally out of control. Following Cooper’s recommendation would expedite the withdrawal of U.S. creditors. The result would be skyrocketing interest rates, a collapsing dollar, and the complete strangulation of the economy.
Cooper then ends with a tired, overused, and worn out drug addiction metaphor to describe the relationship between deficit spending and austerity. What’s more, he gets it completely backwards…
“Think of austerity as a big shiny bag of crystal meth, and D.C. elites as a bunch of jittery speed freaks who haven’t had a fix in weeks.
“Despite the absolute intellectual collapse of austerity as an economic program, it continues to hold cultural hegemony over most of the American elite. As with meth, the damage is immediate and staggering, but they just can’t quit. It’s well past time Democrats stopped enshrining deficit reduction as the most important policy goal.”
For the record, the President and Congress – both parties – are not addicted to austerity; they’re addicted to deficit spending. Moreover, austerity is not an economic program. It’s what happens when you take deficit spending away.
The U.S. government can either do this on their own terms by choosing how to reduce deficit spending. Or they can continue their spendthrift ways and let the nation’s creditors force it upon us. Regardless, their spending programs over the last 50-years have created quite a mess for all of us. We’ll pay for it with our time, our talents, and our treasures.
for Economic Prism