When the Gravy Train Jumps the Tracks

The future consequences of all that has been done to the financial system and the economy over the last four years – from late 2008 to the present – are largely not understood.  There seems to be some broad impression that the stability of the pre-Lehman default era is gone forever.  But it’s not generally acceptable to talk about in front of polite company.

At present the task falls squarely on the shoulders of oddballs, cranks, and killjoys.  We, of course, are part of this sour cast.  We don’t dwell on it.  Rather we get to it, like we get to most things…with a sharpened pencil, questioning spirit, and the stubborn persistence of a pack mule.

No doubt, by the November 4, 2008 presidential election night, the financial crisis had accelerated the economy’s ride down the highway to hell.  Lehman Brothers, the fourth largest investment bank in the United States, and a bank that had been in business since before the Civil War, had vanished from the face of the earth less than two months prior.  About this time, the finance world watched in horror as black swans relentlessly descended upon the LIBOR like common ravens upon fresh Southern California road kill.

The economy had indeed slipped out of whack by the fall of 2008.  Those who paused to consider what was going on knew the nation had gotten fire ants up its pantaloons through a long sequence of economic and social depravities.  Moreover, they knew that new economic health could only return once the rot had been purged from the old, over indebted financial system.  Unfortunately, this slow process of recovery would have to be endured with patience.

Naturally, the truth in such circumstances can never compete with the fantasy that everything can be restored by borrowing and spending.  The dispossessed heard the word “change” and had visions of easy government money – lots of it – lining their pocketbooks.

Reliant on the Government

The new President and his entourage arrived in Washington with much hoopla and the promise that the economy would quickly rebound and they’d usher in a new era of prosperity.  To make this happen, all the accepted laws of gravity and arithmetic were first abolished by Presidential decree.  Congress was eager to comply.

On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act, which sprinkled roughly $831 billion in stimulus spending around on programs everyone could celebrate.  The Act included spending on infrastructure, education, health, energy, federal tax incentives, and expansion of unemployment benefits and other social welfare provisions.  Finally, through a planned economy, the wealth would be spread around to everyone.

But from where did the $831 billion come?  And whence did it go?

Was the money well spent?  Did it create new jobs?  Is the economy better off?  We don’t know.  But what we do know is that all the stimulus spending has created a mammoth class of people reliant on government.

There are currently 46.6 million people enrolled in SNAP – i.e. food stamps – which amounts to about one in seven Americans.  By 2013, SNAP spending will have quadrupled over the last 12 years.  Since President Obama took office the number of people receiving federal disability insurance has increased over 17.3 percent.  Then there are increases in Social Security, Medicare, unemployment benefits and a whole host of other programs that people rely on for assistance.

When the Gravy Train Jumps the Tracks

The problem with helping so many people out by making them dependent on the government is that it puts them in a precarious position.  When the money stops flowing they are hung out to dry.  These people have structured their lives, and made decisions about what they will and won’t do, under the premise that government money will always be there.

Make no mistake…the day will come when the money stops flowing.  Here’s why…

The enormous deficits over the last four years – $1.4 trillion in 2009, $1.3 trillion in both 2010 and 2011, and $1.2 trillion in 2012 – the total national debt of $16 trillion, which comes to $222 trillion (that wasn’t a typo) if you count unfunded and off balance sheet liabilities, represent bright flashing warning signs to all that are reliant on the government.  The great default is approaching…and when it comes, the money will be cut off, and there will be no safety net left to soften the fall.

But that’s not all.  In addition to all of the fiscal stimulus, there’s the massive amounts of monetary stimulus that has distorted the economy too.  Monetary stimulus being: ZIRP, QE, QE2, Operation Twist, and QE3.

Large parts of the economy are reliant on this funny money.  The automobile and housing markets are entirely dependent on record low borrowing costs made possible by the Fed.  On top of that, the government’s ability to finance its debt is also made possible by record low Treasury yields courtesy of the Fed.  As the federal government approaches default, and the Fed loses its ability to suppress the price of money, interest rates will rise and any area of the economy dependent on cheap money will blow up.

Recessions, indeed, are part of the business cycle.  But, typically, there’s robust economic growth between recessions.  New jobs are created, dependency upon government recedes, and GDP expands.  Since the Great Recession officially ended in June 2009, escape velocity hasn’t been reached.

Even though all the fiscal stimulus and monetary easing has pushed GDP into positive, there has yet to be a durable recovery.  Just last week, for instance, the Commerce Department revised the annual growth of real GDP in the second quarter of 2012 down to 1.3 percent from the 1.7 percent reported in August.  The government, instead, has added millions of dependents to its books that it can’t afford and engendered an economy that’s dependent on perpetual money creation.

The gravy train’s provided a nice ride, for plenty of people, for a long, long time.  But eventually something must give; the train will jump the tracks.


MN Gordon
for Economic Prism

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