Accident Waiting To Happen

Here we are at the end of the second quarter waiting for the GDP numbers (not out until the end of July) to tell us if the economy eked out another quarter of “modest” growth. In the meantime, the stock market continues to flirt with record highs and the bond market has sold off substantially on the notion that the Fed will slow its purchasing of bonds – presumably because the coming boom will obviate the need for the economy to be supported by bond purchases.

Estimates for the 2Q GDP number are falling – Barclay’s now has 0.6% growth, Goldman 1.3%. No boom here, but wait – the “second half recovery” must be in play. Oh please.

There are only two ways to grow the economy – increase the number of, or the productivity of, people working. That’s it. Both ways require investment – production of goods and services that are not consumed but instead are used to provide the plant and equipment, infrastructure, technology, skills and training, etc. that people need to produce more goods and services in the future. Unfortunately the government, which includes the Fed, is actively encouraging consumption, and therefore discouraging investment. The idea is a kind of “if you build it, they will come” notion that printing money to buy stuff  lifts aggregate demand, which in turn  encourages people to invest to meet the demand. Which sort of works, except that the people so encouraged are in China, India, Vietnam, and other places like them where entrepreneurship has not yet been regulated out of existence. Naggingly, though, that “D” in “GDP” stands for “Domestic” so the whole policy ends up a waste of time. Oh, and then there’s this pile of freshly printed money sitting around which pretty much guarantees hyperinflation if the economy ever does grow. (Don’t worry – not going to happen).

The problem is that the high priest of this cargo cult form of economics happens to be the Fed Chairman, Mr Bernanke. Despite his horrible track record, many people still believe in his preachings and, more materially, have invested on the basis of the truth as he has revealed it to them. Unfortunately, these people are going to be disappointed. And they are going to be angry and confused. They will do crazy things (if I knew exactly what, I would tell you, but I don’t). In fact, they have already started to do so by selling bonds which have real yields well above the historical norm. When they realize that he has been wrong (again) they will also be selling stocks, real estate and probably also aged grandmothers, in fact everything that’s not nailed down as they will want cash rather than depreciating assets.

So we wait. When is this going to happen? Shrug. Soon come, as they say in the islands. The fact, though, that the pronouncements of Mr Bernanke and other central bankers are the most important financial news should send shivers up your spine. These people do not realize that what they are doing is slowly destroying the economies that they are trying to manipulate, by starving them for investment in order to provide the illusion of prosperity.

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