You cannot cheat the clock forever
By
Bill Bonner Aug 07, 2009
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At least something good has come of the economic crisis: it blew off the purple robes that clothed economists and exposed their naked flanks. Still, they don't deserve the beating they're getting in the press – with snide remarks and sarcastic comments. They deserve better. A beating with sticks!
Even Alan Greenspan admitted he had "found a flaw" in his own thinking. We will have to imagine the giggles from the back of the room – if anyone had been awake. If was as if Stalin had confessed to being rude to his mother, or Bernie Madoff copped a plea for shoplifting. The "mea" was fine, but the "culpa" didn't measure up to the facts. He, more than any living human being, was responsible for the biggest financial debacle in history; you'd hope he'd be a gentleman about it and hang himself.
Meanwhile, the Queen visited the London School of Economics and asked: how come economists were not on top of this thing? Last month, they replied. In a three-page letter they avoided the simple truth – that their trade was no more reliable than fortune-telling and marriage counselling. They claimed a "psychology of denial" had prevented government and financial eyes from seeing the catastrophe ahead. It was "a failure of the collective imagination of many bright people".
It was the exact opposite – imagination run wild. At the heart of the delusion was an idea so preposterous it almost couldn't be a simple mistake. Economists imagined a world without yesterday or tomorrow; a world in which you could run up debts forever and never pay them back. They were like a primitive tribe with no verb tenses, neither past nor future. Still, when they invited you to hop into their 'hot tub' it's hard to believe they weren't looking ahead to dinner.
Last week, US Treasury secretary Timothy Geithner promised the Chinese that the US economy would recover thanks to demand from the private sector. That was his way of reassuring America's biggest creditor that the public sector wouldn't continue to run huge deficits – practically an outright lie. But it's one thing to stiff the Chinese; it's another to stiff time. Adjusted for inflation, the US consumer's earnings have barely risen since the 1970s; by some measures, he actually had less disposable spending power in 2007 than in 1973. And now his income is going down. The June number reflected the biggest drop in income in four years. Salaries and wages fell 0.4% in June – the ninth drop in the last ten months. How is it possible for him to spend more? Whence cometh more demand from the private sector?
We pose the familiar question – only to set up an unfamiliar answer. In the past, the consumer reached into the future. In many cases, he reached beyond the future and into never-never land. Consumers didn't want to wait until they'd made the money to take vacations or buy houses. They borrowed against future earnings. They spent money they hadn't earned yet, bringing forward purchases that should've been made years later. The accumulated effect of this was to add $35trn in extra spending to the world economy – from America alone – over the course of the great credit expansion, 1945-2007. That's why we have a depression now; because consumers already spent what they would normally be spending now. The future is here.
Time always gets even. Now, it's the past that's doing the reaching. The automobile bought in 2006; the house bought in 2005; the vacation taken in 1999: the ghosts of yesteryear spending reach for Americans' paychecks. Of course, in some cases consumers spent more than they could reasonably expect to pay back – ever. They reached so far the poor ghosts are disappointed. Lenders realised they'd never get their money back, which is what led to the credit crunch and the collapse of Wall Street. Of the big five – Bear Sterns, Lehman, Goldman Sachs, JP Morgan and Merrill Lynch – only two survived intact. And we know now that Goldman only survived because Henry Paulson, its former CEO and then Treasury secretary, arranged a hidden bail-out: he had the government step in to save AIG, which owed Goldman $13bn.
From one scam to another: from bailing out Wall Street to bailing out the entire world economy, the more stimulus programmes fail to bring a recovery, the more US economists call for more stimulus. The International Herald Tribune on Monday said: "More stimulus is needed to spark a strong recovery".
What are they thinking? Since neither the private nor public sector has any savings, extra demand from either must be borrowed from the future. (Setting aside 'quantitative easing', or Zimbabwe-style stimulus: an even bigger fraud.) But borrowing from the future is what brought on the current malaise. Whether it is the private or public sector reaching into the future hardly matters: either way, the same saps are supposed to pay.
The purest illustration of how this works is in the popular 'cash for clunkers' programmes. Instead of letting consumers wait until they are ready to buy a car, the feds give them money to buy it now. So, they buy in 2009 not 2010. What good is accomplished? It's as if they didn't expect 2010 ever to arrive; as if they thought they could hoodwink time itself, as well as the Chinese. The more economists try to stitch up the future, the less they seem like harmless fortune-tellers – and the more they seem like conniving shysters.
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