Can economists get us out of this mess?
By
Bill Bonner Oct 04, 2007
Print this article
Economics has been called the “dismal science”. But the expression is pure flattery. Economics is not science at all. It is more like marriage counselling; if it works at all, it is probably just an accident. The field attracts more impostors than an Elvis convention. And it harbours more dangerous delusions than a National Party convention. In fact, there are so many economists on the loose that if they were all laid end to end… it would probably be a good thing.
Economists don’t have a sense of humour. The Bank of England, the Exchequer and the US Federal Reserve have all recently made the most absurd announcements; but nobody laughed or asked questions. On both sides of the Atlantic, people are getting worried. Lured by economic policies, they’ve borrowed too much, spent too much and taken too many risks. So, up to the microphones step the world’s leading economists – Ben Bernanke and Mervyn King – with a solution to a problem that they, more than anyone else, created. In the popular mind, they brought succour – money, that is – to those who needed it; they offered to turn the liquidity crunch into the heady wine of another boom.
But how? Of course, they have a theory. Lord Keynes let it fly many years ago: give the people a little extra money, he said, and it will “turn stones into bread”. How is this miracle performed? No one even asks. To his credit, Keynes had the good sense to suggest that government might want to run surpluses in good years so they’d have some money to let out in bad ones. This saving grace has long been forgotten, of course. Now, the money itself arises immaculately; people don’t even bother to wonder about the hanky panky that conceived it. Nor is there much interest in the details. Ben Bernanke gave the US a half point rate cut last week. Prices are important information. And no price is more important than that of money. In the event, the Fed’s Open Market Committee opted for a 0.5% cut. How did they know a Fed funds rate of 4.75% was just what the market needed? Why not 4.5%?
In the prevailing theory, consumers sometimes need encouragement. Otherwise, they might fall into bad habits, such as saving. Then, prices would fall, so they would put off spending even more. The whole economy would collapse into a ‘liquidity trap’, where not a penny changed hands, businesses had to close their doors, unemployment increased… and everyone got poorer.
Even if it were so, as a theoretical matter, so what? Are people saving too much now? Do we really need to encourage consumers to spend? You might as well encourage a thief to rob a bank! Economists are also hallucinating if they think everything else will stay put while their easy credit does its magic. On the day the Fed cut short-term rates, long-term rates rose almost an equal amount. Lenders guessed that looser credit conditions would lead to inflation. The housing market, the one they were trying to rescue, depends on long, not short, rates. So, the subprime borrower got no relief and 2.5 million will have their mortgages reset to 10% anyway.
What central banks giveth, markets taketh away. Over the years, US authorities have done such a splendid job encouraging consumers to spend, they have no money left. Total credit in the US rose from 150% of GDP in 1971, when the dollar was cut loose from gold, to about 340% today. Overspending and overborrowing have turned the whole country into a subprime mess. People have more debt than ever, while their dollar-based assets and earnings go down. Over the past five years the subprime nation has seen its currency fall about 20% against its major trading partners. This year Americans will buy $2.5 trillion worth of goods from overseas. If the dollar were worth what it was in 2002, they’d get 20% more for their money – an amount about equal to the total of all the mortgages to be reset over the next 18 months.
Against other things the dollar has lost even more. Zinc has gone up 60% in the last year alone. Over the past five years, oil has risen 158%. Wheat is up 126%. When a currency goes down, those who count their wealth and earnings in it get poorer. Americans have lost about $10 trillion in wealth over the past five years – just from the fall of the dollar. Their houses, stocks, savings and wages are all worth a lot less than they were. It is as if two out of three of all the companies listed on Wall Street had gone broke. Note to central bankers and economists: thanks a lot.
Published in
Economics
| More
articles
by
Bill Bonner
Related articles
-
By David Stevenson, Feb 08, 2010
-
By John Stepek, Feb 04, 2010
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.
