It’s a real shame there’s no warning system, like an air raid siren, to tell people to take cover from the bad idea de jour. For a bad idea coupled with a good story will compel vast populations to ruin themselves. Once established, there’s no turning back. Bad ideas must run their natural course leaving destruction in their wake. Then they must run their course again, and again.
Communism, for example, made an utter mess of the 20th century. Armed with all the smartest guys in the room, the Soviet Union’s state planning committee drafted up five year plans for what it called the centralized development of the national economy.
The first five year plan brought to realization the grand idea of collective farming. What could be more efficient than commanding what crops to plant and acreages by bureaucrats in Moscow? Regrettably, the planners soon discovered that collective farming doesn’t bring forth the fruits of collective abundance. Quite the opposite, they found…it brings forth the fallows of collective famine.
You’d think Mao would’ve learned from the Soviet Union’s failed roll out of centralized agriculture in the 1930s. But, alas, he was so enamored with the bad idea he included it in his Great Leap Forward some 30 year later. Predictably, Mao was greeted with the Great Chinese Famine.
Stimulating Demand with Credit
Nonetheless, Communism isn’t today’s burden. We’re merely holding it up to ridicule. It offers a simple illustration how a bad idea can grab hold of intelligent men and transform their minds to cow manure.
Rather, today we take aim at one really, really bad idea that’s conquered the popular delusion of policy makers and academic economists the world over. We believe the bad idea has about run its course. But first it must lead us all to a final economic and financial catastrophe.
The bad idea is that stimulating demand with credit based consumption produces economic prosperity. The Federal Reserve, among other central bankers, uses this bad idea as grounds to issue massive amounts of cheap credit. Their sole intent is to entice people to borrow money…and spend it.
More credit will result in more spending, they reason. More spending, they say, will result in an economic boom. An economic boom will result in more jobs…and prosperity for everyone.
Sounds great in theory, right? But in practice these cheap credit policies do not produce a stronger, more robust economy. They simply raise asset prices to unsustainable heights. They also lead consumers to buy things they don’t need – like light up reindeer antlers – with money they don’t have. Ultimately, this makes a big mess of things. Here’s what we mean…
One Destructive Bad Idea
The flipside of credit, of course, is debt. It is the anchor around the middle classes ankle that indentures them to servitude to the banks. At some point a borrower cannot borrow any more…even though lenders continue to give more and more credit. For just servicing the debt becomes impossible.
The U.S. economy and most western economies have reached total debt saturation. That’s why piling on more debt through massive fiscal stimulus and monetary easing over the last six years has only succeeded in producing a lethargic economic recovery. Suspending the problem of too much debt by adding more debt has surpassed the economy’s debt capacity…the addition of new debt now only weighs the economy down.
When the financial system cracked and the economy slipped in 2008, the government wagered they could return growth to the economy through borrowing gobs of money. That gamble has resulted in a big fat goose egg for the economy. Additionally, politicians and voters have painted themselves into a corner.
They extended the bad idea to also include financing massive amounts of government spending with massive amounts of government debt. The federal government has now racked up the national debt to over $18 trillion. Tack on unfunded liabilities, like social security, prescription drugs, and medicare, and the debt runs up to a breathtaking $116 trillion. Each taxpayer’s on the hook for over $1 trillion.
There’s no way out of the consequences of this one destructive bad idea. The amount owed is too massive to ever be repaid outright. The only solutions are default or inflation. Thus far the government is pursuing the expedient…they want inflation. They’ll keep extending credit until the whole think blows up. Perhaps, then, this bad idea can be put to rest…at least for a generation or two.
for Economic Prism