Bill Bonner: we are all Jackasses now
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Bill Bonner Jul 31, 2009
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For whatever reason, the French newspaper Libération recalled a grim event last week. On 4 February 1912, Franz Reichelt, also known as the 'flying tailor', put on a homemade outfit designed to work like a parachute. He went up to the first observation level of the Eiffel Tower, hesitated... then, he stepped over the rail and jumped. Alas, he did not fly. Nor even float. He fell "like a stone", the paper reported.
Immortality was achieved, but not in the way he'd hoped. His stunt was captured by the motion picture technology of the time. That silent film inspired the popular Jackass videos, which show people engaged in reckless acts of mischief.
But we don't have to go to YouTube to enjoy the genre. We have only to read the financial pages. All over the world, the authorities are strapping on their absurd parachutes and climbing to very high places. In Europe, banks borrowed €442bn last month from the European Central Bank. Much of it is lent back to European governments. In America, stimulus funds are used to fix public toilets as well as to repair Wall Street's balance sheets.
Trillions of dollars have been put at risk – $23trn in the US alone. Yet, despite the most daring experiment in stimulus ever, by the end of June, the British economy was 5.6% smaller than a year before, paralleling the decline that followed the crash of 1929.
On the evidence, stimulus programmes aren't working. Where they are tried the most they work the least. For proof, we go to Stimulation Nation itself. From America last week came news that new house sales had finally turned up, rising 11% in June. That was the monthly figure. On an annual basis, they were down 21% – and at the second lowest since they began counting in 1963.
Since the population is much bigger now than 52 years ago, it was relatively the worst June ever for new house sales. And now that the economy is in a slump, the rate of new household formation has fallen in half. Lower incomes and worsening job prospects mean people are less eager to set up new households – reducing demand for new houses.
Unemployment shows no sign of improving, either. The stimulus programme was supposed to cap joblessness at 8%. Officially, the rate is now 9.5%. Economist David Rosenberg puts the real rate at almost twice that. And businesses are cutting jobs even faster than expected. Economist Arthur Okun suggested a rule of thumb for predicting unemployment levels in a downturn. But firms are not only laying off redundant workers; they are laying off workers who would normally be spared. What's more, those who are left are working the shortest weeks ever recorded.
In the past, workers were quick to follow the jobs. The Sun Belt usually bounced back first. But Florida, California, Arizona and Nevada have been flattened even more than the rest of the nation by record foreclosures, government cutbacks and bankruptcies. Now, the jobless stay put, and unemployed. Currently, the excess capacity in the US is staggering – both in labour and capital. Capacity utilisation is only 65%; in theory, output can grow 35% before any new capital investments are made. Recovery? "Forget it," says Rosenberg.
Now that the facts are out of the way, we end our critique of stimulus and turn to laugh at the stimulators. "Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back," wrote John Maynard Keynes. Now it's Keynes's voice they hear. "We are all Keynesians now," said Richard Nixon as he strapped on a crash helmet.
Keynes probably got the idea of a counter-cyclical stimulus in Bible class. And a good idea it was. Simple, intuitively correct, practically demonstrated and theoretically sound. But he and his followers still managed to screw it up. First, Keynes's General Theory is no theory at all – at least not in the scientific sense. It can't be tested. The results aren't reproducible. Instead, it's merely an idea about how things should work, based on an Old Testament story.
Pharaoh dreamt he saw seven fat cows devoured by seven scrawny, misbegotten cows. He didn't know what the dream meant. So he called for a young Hebrew man who had interpreted dreams for his master. Joseph told Pharaoh Egypt was to enjoy seven years of abundance followed by seven years of famine and that he should store all the grain he could from the fat years, so he could pass it out when the going got tough.
This is a story we all know. It's easy to tell and to understand. But modern economists twisted it as though it were an inflation statistic. They maintain that when the business cycle turns down, it's just like a drought. They can counteract the effect of the drought by giving the economy stimulus – liquidity – from the public sector. The trouble is, they missed the point completely. Do you recall any public official urging the public to stop spending so much in the bubble years? Instead, they encouraged people to eat their grain. Governments ran deficits even during the bubble years. Now they have no real grain to offer. So they turn to a reckless, disaster-defying stunt.
Future generations will watch the video and laugh until their stomachs hurt.
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