A reader took issue with my optimistic view of the current world economy. Essentially my view is that we are in a long but sustaining recovery, that will continue despite bumps in the road.
A Contrarian View
The reader’s view was that what we are seeing was the effects of the massive injection of government liquidity over the past while, and when that forced liquidity ends in the near future, the economy will slump as it will have no basis of support.
He also points out that world debt continues to increase and the danger signals are mounting.
He points out that a slight rise in interest rates will wreck havoc (read my blog as the effects of a small interest rise in Japan).
He points out that unemployment remains stubbornly high, and that US house prices continue to weaken
These are Good Arguments and Good Rational for Being Cautious
I do not agree with this contrarian view. Let me address these points individually.
Lenders Vote With Their Wallets
Let’s start with the ‘willing lender and willing borrower’ theses. While it is true that the US Federal Reserve continues to create massive amounts of debt to inject into the system, still that only accounts for a part of the massive amounts being lent by willing lenders to willing borrowers.
For every amount borrowed, it has to be borrowed from someone, and not all of these lenders are government. Governments just don’t have that sort of power. So ask yourself, if someone believes the sky is falling, would that person enter into an arrangement that will result in the loss of his capital. The fact that sophisticated people are willing to lend is a strong sign of confidence.
Put this in another context, people have beliefs as to what may or may not occur while lenders are voting with their wallets.
Debt Levels Continue to Rise
This is troubling, but capital flows to borrowers in many ways, and it flows because lending capital is available to lend and searches out borrowers.
When is the last time someone borrower from someone who didn’t want to make the loan?
What also is continuing to rise is economic activity.
Banks are all bigger now than last year, or the year before.
Auto makers are making money at such a record pace that they have either completely paid off their loans or are in the process or doing so.
Rents in commercial activities are rising. Vacancies are shrinking. Luxury goods vendors are making record profits.
Derivatives are now greater in gross amount than before the crash. The market has matured and derivatives are now much more solid and less flaky.
All of this means that economic activity is expanding and somewhat surprisingly rapid.
The Theory That Government Providing Liquidity Actually Provides Economic Stimulus
This is the core of the argument that central bankers are essential to the capitalist society.
I beg to differ.
Government stimulus is a very short term boost that is highly inefficient, and borrows from the future. Most of government stimulus flows to parties that hoard it, or reward themselves, or use it as extra capital for their own purposes. If capitalism is efficient, capital is used efficiently. Massive amounts of money from government are always less efficient in their usefulness than normal capitalistic activity. The money flows to favorites and people with government connections. Only a bit of it flows into the general stream of economic activity.
Yet we all pay for this government largess in that it is the taxpayer that pays the blil.
Was It Better to Allow a Cleansing of The System or Prevent the Cleansing?
When the crash of 2008 came, it was far more severe than it should have been because Greenspan tried to prevent a downturn since the year 2000 by pumping enormous amounts of liquidity into the system every time there were signs of a slowdown. Legislators actually cheered this stupidity.
In essence, the system was never allowed to cleanse itself by punishing those who went to excess or made bad judgments. Greenspan (The Great Man) almost destroyed the world economy.
Having this irrefutable fact in front of us, makes us somewhat suspect of the current claim that government economic stimulus is a good thing.
Unemployment
This is a most unfortunate fact. Unemployment will remain high for some time to come.
In every economic downturn, the ones to suffer are the working class and the middle aged executive who can be efficiently replaced with lower cost and more energetic younger workers. What exacerbates the problem is that manufacturing jobs continue to migrate to lower labor cost jurisdictions. That is a fact of life and it has been for a very long time.
In every downturn since the great depression, unemployment remained stubbornly high for years after the recovery started.
Real Estate Prices
As the population ages, and working class jobs migrate overseas, little relief is in sight for the real estate market, which remains the largest drag on the economy.
But surprisingly, in spite of this massive drag, the economy is actually expanding. Maybe for the first time in a very long time, the US economy will rise from the ashes based on something other than people borrowing more and more against their homes.
How To Deal With the Debt
Just putting a stop on expanding the debt, will solve the problem. Look at the statistics from my recent blogs as to the time effect on debt. Debt becomes less significant over time. Canada is the example for the world. Debt doesn’t have to be reduced in absolute terms. It has to be reduced in comparison to GNP, to the number of taxpayers, to the effect of inflation over any reasonable period (which effect is amazingly dramatic).
The Answer is, we are recovering and unless government does something stupid, the natural demand of an expanding middle class worldwide, will escalate this growth over time.
