Bill Bonner: Bubble deniers II
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Bill Bonner Jul 17, 2009
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Across the world, the feds deal with the problems they caused by causing more of them. If you ask a serious economist, "What was the lesson of the Soviet economic experience?" He'd have a ready answer: "It was that distributed information is more reliable than the centralised variety." In the non-communist world, if a man had money and no bread, he exchanged the former for the latter, and sat down to dinner. As if guided by an 'invisible hand', millions did the same. Everyone tried to get a bit more grease on his plate, by making his own decisions based on the facts before him. The result: standards of living rose for practically everyone.
In centrally planned economies, on the other hand, neither householder nor baker had a choice. Their tasks were set by apparatchiks who presumed to know exactly how much of society's resources should be devoted to making bread – and exactly how much each person should eat. By the 1980s, it was obvious that central planning had failed. By 1990, both the Soviets and the Chinese had abandoned the experiment. Mankind sighed with relief. It seemed to have made a genuine great leap forward. Finally, it was generally accepted that people should be able to offer up their money as they did their prayers – to whatever god they chose.
The planners had made millions of people miserable over seven decades, but none were hung from lampposts. Rather, they retreated to the universities, central banks and finance ministries, and kept meddling. Soon, they were in the drivers' seats – and headed for another wall. The crash of 2008 cut world asset values by as much as $50trn. But did the planners learn anything?
"This is where I have the greatest problem with US economic policy makers," writes Marc Faber. "I don't think they have ever recognised that the excessive, credit-driven expansion of the US economy was unsustainable in the long run and that, sooner or later, the current crisis was inevitable." The bubble deniers deny there was a bubble and that their own stimulus caused it. Instead, they add more stimulus.
"While it is likely that these policies will stabilise the economy at a lower level of output, they are unlikely to lead to sustainable, healthy growth," continues Faber. Worse than that, they're likely to lead to new bubbles and new explosions. In the gallery of death-bent deniers, China is a special case. "To get rich is glorious," announced Deng Xiaoping after coming to power in 1978. The state pulled back its long arm. People were free to run businesses, pay wages, keep bank accounts. Today, in many ways, the average Chinese entrepreneur is freer than, say, his counterpart in Britain or the US. He faces fewer obstacles. Factories go up overnight and he's in business.
So dynamic was the Chinese economy that it responded to America's centralised monetary policies in record time. Spooked by the recession of 2001-2002, the Americans cut rates and boosted public spending. This brought a bubble in the housing sector, which gave English speaking consumers an appetite. Soon they were gobbling up boat loads of Chinese-made goods.
Now, it's indigestion to which the central planners respond. An IMF report gives us a measure of the response. Add up all the loan guarantees, toxic asset purchases and other forms of bicarbonate administered by the G20 nations and they come to about a third of their combined GDPs. Those are just the monetary stimulus programmes. The fiscal ones add another 5.5% of GDP. America's central bank adds reserves so fast it must be running out of storage space. As for its fiscal policy, this week it has passed the $1trn deficit milestone; by the end of the year, the deficit is expected to be nearly 13% of GDP.
For their part, the Chinese enjoy the liberty of the damned. With no creditor looking over their shoulder, they are free to fight the downturn even more
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