Mainstream economists believe that the economy is at or near a “bottom”, and things are slowly getting better. They believe it will take another year, but things should be better in '11, and perhaps get back to normal (i.e., job creation?) in '12. My understanding of AE tells me they are disastrously wrong.
The interventions since the '08 collapse of the banking system have led to malinvestments. The nature of these malinvestments differ from the housing bubble. Now, businesses (i.e., banks, auto industry for example) and the U.S. Treasury bond market that should have failed are being propped up. This is nature of the current boom.
I contend we are in a “boom” right now even with 10%+ unemployment (U3). These malinvestments will be exposed, and the bust will be severe given the existing unemployment, extreme deficits, and extreme levels of money expansion. Instead of crashing from a high level of employment, like '07, I contend we’re going to crash from high level of unemployment.
The timing can’t be predicted, but am I on the right track here? Is this contention grounded in Austrian theory?
The bubble is being formed by means of monetary inflation, which is dependent of the Federal Reserve. The post -07 inflation was the greatest increase in the supply of money by the Federal Reserve in the history of the United States. You can see the effects of the money in the stock market and commodities, since much of this new money is being lent out by investment banks.
My understanding of AE leads to me to conclude that “stimulus spending” is not “stimulative”, rather, it merely produces positive changes in the statistical measure of GDP. It is actually “deficit spending” which simply reallocates and squanders scarce resources, plus the “crowding out effect” due to U.S. gov’t borrowing. So, I conclude that, in spite of the deficit spending, the malinvestments described in my OP will lead to the next bust. Thus, we will have a bust from high levels of unemployment. The deficit spending will not lengthen the bubble. It is the money printing that produced the malinvestments, and thus, the current bubble.
This is based on my understanding of AE, which I"m trying to flesh out in this thread.
I’m of the opinion that much of the current intervention has been around preserving the previous malinvestments with the intent of keeping the TBTF’s solvent. To visualize I like to imagine a pool of dollars made up of debt and (fiat) money supporting a price level. The debt portion is shrinking and the Fed is trying to refill the pool with fiat in order to maintain the price level. The goofy part is the way the underlying assets those dollars represent can be leveraged and what that means when values start to shrink.
I’m in agreement that this could drag on for quite a while. Inevitably it’s gotta tank but who knows when. Japan has limped on for over a decade reading from an identical playbook, difference is Japan had some sort of “real” economic activity to keep the wheels grinding along (ie: existant export sector).
“Government boom?” Is this a concept from the Austrian school / framework?
Failed businesses being propped up, and U.S. government debt being propped are not malinvestments? There has to be an intent of returning a profit? It seems that resources have been diverted into unsustainable activities, the essence of malinvestment.
What is the implication of a “government boom” vs. a boom based on malinvestment?
You are absolutely right in believing the worst is yet to come despite the mindless optism and the downright chicanery surrounding the present GDP rebounds. And you are absolutely right in holding to Austrian economics.
The present big malinvestment is in credit. Historically banks have made the most money lending out to productive activities, be them sound businesses needing the money to retool and/or expand or newcomers with good, sound business ideas and decent collateral. Now they are scared, “sitting scared” as Gary North said. They’ve stopped lending to businesses and not even the threats of school bullies like your President Obama cannot move them. Where they haven’t become all the more cautious is in consumers credit. They are still borrowing money to people wanting to buy the latest gadget they don’t need or getting cajoled into buying the latest tin box that will fall apart when they finished paying for it. Like Jonathan said the other sector where they poured money into is investment banking, the driving force behind GDP growth from Los Angeles to Berlin together with government spending. It doesn’t take Mises’ outstanding mind to understand this is seriously wrong: money is being refused to the most productive sectors of the economy and poured into consumption and the most audacious speculation.
How long can they drag this thing on? It all depends on how long it will take for Western leaders to spend themselves over the edge. I am not talking about money: not even Britain in the '70s went bankrupt in face of colossal incompetence. I am talking about respect and credibility. People in the street may hate the present President or Prime Minister but they trust the State, completely. They just think they need to put the “right person” at the helm and all will be right with the world. Right now this trust is being quickly eroded: people wonder why GDP is growing at 5% while they are being kicked in the middle of street or why they are told inflation is at “an all time low” while fuel and foodstuff prices are skyrocketing. We just need to help them understand… and that’s a tough nut to crack!
Eventually these booms and busts are going to lead to a currency crisis. Each time we go thru a boom and bust we end up with more debt. I’ve been watching 2 numbers, the total debt vs tax revenue. At some point soon we won’t be able to raise interest rates even if we wanted to because we won’t be able to make the “minimum payments” on the debt.
Currently the debt is 13.3 trillion and the tax revenue is 2.1 trillion. That means if we raised rates to 10% the payments on the debt would reset to 1.3 trillion since most of the debt is short term. That would only leave .8 trillion left to fund goverment. That’s when the serious money printing starts.
Nice. I’ve been keeping track of this ratio as well. Most people don’t realize that, while the U.S. has a relatively low debt to GDP ratio, the ratio of debt to tax revenues is among the highest in the world.
A quick example -
US and Germany have about the same Debt to GDP ratios - 80%. However, the debt to tax revenues ratio for the US is about 6x and rising, while for Germany it’s less than 3x.
Using Debt to GDP makes little sense in judging the credit risk of a country. It’s like using Debt to Gross Revenues to judge the credit risk of a company.
I believe about $2 trillion in gov’t debt has to rollover each year, in addition to the new debt added by the annual deficit. I think you’re describing the doom’s day scenario: The bond market collapses, yields soar, the government has to borrow more money, the Fed has to print money to buy debt due to lack of demand from the open market, increased money supply causes yields to rise further. This continues until the currency collapses (goes to zero). A fascist state will be established before this process is completed. I contend that the bond market can collapse suddenly, like Lehman or AIG did.
I wouldn’t place my hopes on a fascist state being founded. Fascism was a really peculiar historical event that could only have been produced by early 20th century European society. No Erich Ludendorff as a war hero promoting total dictatorship, no Hitler to assume the role.
If there is going to be change, it will have to come from the structure of American society itself.
A government boom is a debt-fueled expansion of government. It can only go on as long as there is a market for this debt. When the market for the government’s debt vanishes, the bubble bursts.
Unfortunately, when this happens, there is no malinvested capital to liquidate. There are only hordes of government employees struggling to survive. Witness Argentina, 2001.
Wikipedia: “Fascists advocate the creation of a single party state, with the belief that the majority is unsuited to govern itself through democracy and by reaffirming the benefits of inequality. Fascist governments forbid and suppress openness and opposition to the fascist state and the fascist movement.”
I know Wikipedia is not the end-all on the subject of fascism, or anything else, but after reading the rest of the article it seems like the process has already begun in American society. Since the Republican / Democrat two party system is a false paradigm, there really is single party rule today. I agree with you that the coming oppression will be uniquely American, I had not thought about it that way before.