Adam Smith rightly noted 2030 or so years ago that productivity was the source of wealth. Today we have turned to spending and consumption instead.
The early 1960’s were a time when American looked to the future with unrestrained anticipation. I remember visiting the 1962 World’s Fair, which was built around the theme “The 21st Century.” Everything was oriented around a better future built on high technology and all that it could bring. Space travel was hugely popular and no one seemed to think that American Exceptionalism could somehow end.
The exceptionalism was, in large part, based on wealth, and the wealth was a result of a system that featured a wealth of opportunity and made a virtue of thrift. Thrift, in turn provided economic capital and when this combined with the intellectual capital acquired or developed in the wake of WWII, the sky appeared to be the limit.
But there was a problem. This problem I discussed in a 2008 piece dealing with the credit crunch, and the late 20th century economy; that a large part of the problem centered on the overuse of credit. What was not covered in that piece was the relationship between politics, consumption and credit; a relationship that may well have grown out of the Keynesian focus on consumption and the political desire to promote a mass consumption society in order to provide an image of unlimited prosperity and all times, and effectively at all costs.
The problem begins with the simple fact that economies never travel in totally straight lines. Examine a chart of the Dow-Jones Average during a bull market trend. The line travels steadily upward, but every so often there is the, occasional, downward movement. The trend continues, but as a technical analyst would say, the market had achieved an “overbought” condition and had to correct before continuing the upward trend.
Economies encounter similar breaks in the trend, as well. It is as if they need to pause to catch their breath before continuing further. But to a political body that becomes obsessed with the prosperity image, and refuses to see a short pause as reasonable, the belief in a need to apply a Keynesian style stimulus becomes overwhelming. This helped, over time, to fuel credit expansion beyond reasonable limits. When you combine government overspending with an overextended private sector something has to give. What market analysis tells us about the last several years is that business and individual spending has contracted. People are paying down debt. Businesses are refusing to borrow, even at the incredibly low interest rates now available. Risk avoidance has become a major part of financial strategies.
Meanwhile, government policy makers have been ignoring the facts and pushing ahead with their “jump-start” policy approach. After all, politicians want to be re-elected to office and the best way for that to happen is assure prosperity. But jump-starting and pump priming aren’t working. Immediately restored prosperity isn’t in the cards right now because the economy has effectively run out of energy and has to catch its breath. Of course, getting government out of the way might help, but the folks in government who see it as their mission in life to control as much of everything as possible won’t let this happen.
Back in 2009 in another column this writer asserted that economies don't do what you want unless you give them what they need. In our present situation the economy needs a break, not more stimulation. One might compare it to someone who has been repeatedly dosed with amphetamines and is now completely worn out and on the verge of a physical breakdown. But economies don’t experience heart attacks. Instead they are more likely to go into such situations as depressions or hyperinflation instead.
What America is presently experiencing is a condition that can be considered roughly akin to cognitive dissonance. The mind, e.g. government, is misinterpreting the evidence of its own eyes and is acting incorrectly as a result. That us, assuming that it is not acting more out of the personal interest of its members, rather than in the best interests of society as a whole. This may well be the case where the top officials in the Treasury Department are so closely connected with the investment banking business as to create a serious concern over conflicts of interest. It becomes even more important when one considers that the investment banking industry stands to profit every time the government issues more financial paper.
But there’s more to consider as well. Governments at all levels are running into the brick wall of an inability to continue spending as they have in the past. Commitments are simply outstripping the supply of funding that is available, and still a lot of them are unwilling to make the decision to prioritize and cut. This is an issue that is facing the state of Texas right now, and the legislature is having a very difficult time facing the fact that there simply isn’t enough money available to continue as in the past.
In the end, the real issue is that while many people are discovering that you can’t spend your way to prosperity, others refuse to recognize the fact. Yet, such facts are like laws of physics; you ignore them at your peril. Continuing to overload America will still more debt will not bring prosperity, but will instead increase uncertainty in the American economy, and distrust in the future. The result will be continued stagnation until the debt situation is stabilized and the level of risk versus potential economic rewards is once again at acceptable levels.
The major question presented to us right now is when, if ever will we again see a normal risk/reward situation and will the debt problem be solved. There is no ready answer. The accepted wisdom that spending is the key to prosperity will have to be replaced with one that accepts thrift in equal measure with spending and divorces economic performance from political decision making; perhaps an impossible task.
In the meanwhile, expect stagnation to continue as long as the government continues it mad spending ways and refuses to turn the engine of American productivity loose by turning down the level of regulation. Don’t expect that to happen any time this year.
Three issues here. We have become a society of ‘immediates’. First there was our penchant for immediate gratification. The previous generation had no such issue. “Why wait!” of “Buy now, pay later!” or “You CAN have it all!” fueled our desire to fulfill any dream we could dream.
Second we don’t believe there is any such thing as a loser. If we invest, we expect those investments to prosper. If we participate we expect to win. All gains are personal, and more important; all failures are ‘shared.’ If an investment folds, it must be collusion by people in high places; it certainly cannot be because I put all my money in a buggy whip factory last year. This failure has to be someone else’s fault; and government should do something!
And that’s the third issue. No self reliance’ It is no longer; “Ask what you can do for your country.” it’s “What can we all expect the country to do for us?”