The real economy declines. The parasites multiply. See chart below…
First, a look at the markets:
Stocks went nowhere yesterday. Maybe the feds had taken the day off;
MarketWatch charges them with manipulating share prices.
Gold, however, staged a $17 rally. The correction in the gold market
may be over. Or it may not. This market has more surprises in store;
we’re certain of it.
“I think you’re wrong about something,” begins a letter from a Dear
Reader. “You act as though government spending were always a crime, a
sin, or at least a waste of money. In fact, soldiers working for the US
government protect the country. Roads make it possible for you to drive
from Bethesda to Baltimore (I don’t envy you there). Even the paper
pushers are necessary; bills need to be paid. Retirees need their
checks. Government spending may be inefficient, but it is still a real
contribution towards GDP.”
Our pen pal is correct. Government employment includes thousands of
honest people doing honest work. Some of it is useful. The trouble is,
since it is not subject to market pricing, you never know how useful it
is. When is something worth doing? When people will voluntarily pay you
for it. How do you know when you should do more of it? When the risk-
adjusted profit you make from doing it exceeds the rate you could get
from lending your money to the government, risk-free. Why are so many
people willing to lend the government money now? Because the rate of
return from other investments is so low…and the risk is so high.
Markets are constantly discovering how useful and desirable things are.
Prices change all the time. One thing rises…another thing
falls…always directing producers and consumers towards the best use
of their money.
But government highways, wars, and bureaucracies aren’t priced by
markets. So you never know what they are worth. In a real war, a
country may be willing to pay its last dime to beat back the enemy. But
what about ‘wars of choice’ such as Iraq and Afghanistan? How much are
they really worth? No one knows. And no one really cares. They become
just a few more government programs…eternally sucking away resources
from the real economy. There are dozens…hundreds…of government
programs set up during the Great Depression that are still alive. Each
one has grown year after year…and each one now employs thousands of
well-paid workers. And each worker not only gets his salary check, he
also gets health care and retirement benefits…and he needs an office
to work in and a place to park his car. And what is he doing? What
would happen if he stopped doing it? No one knows.
But here at Markets and Money we can take a guess. Ninety percent of
Washington could take a hike…and life would go on as well or better
than it was before.
Out of 10 government employees, probably 2 do useful things…things
that we would willingly pay for if they weren’t done for us by the
government, though we would almost certainly pay less for them than
they cost us now. Five others do things that are not worth doing at all
– things that are purely wastes of money. And the other three do things
that destroy wealth…things that actually make the situation worse.
Those three are economists. Or lawyers. Or who-knows-what.
Of course, people in the private sector do stupid things too. Just look
at the fellows writing subprime mortgage contracts. Or the fellows
performing rap music. Or the fellows selling televisions. But, hey,
that’s just our opinion. Let the market (the consumer) decide! It’s not
up to us. Thank God.
By and large, in the private sector people get what they want…and
what they’ve got coming. People who waste money soon don’t have any to
waste. People who make bad business or bad investment decisions go
broke. Mistakes are self-correcting…unless the government steps in!
In the public sector, it ain’t so. Mistakes are self-perpetuating. The
last thing a bureaucrat wants is for his mission to disappear. If he is
fighting illiteracy, it is a fair bet that fewer children will learn to
read. If he is fighting poverty, it is a fair bet that more people will
be poor. If he is fighting terrorism, put your money on terrorism.
Failure is rewarded with bigger budgets, while success is self-
So, as the percentage of the economy dictated by the government
increases, so does the waste, the inefficiency, and the counter-
productivity. As the Soviet Union discovered, you can increase GDP by
government order…but all you get is a whole lot of nothing. We
traveled to Russia at the end of the Soviet period. By then, Russians
had been reduced to unimaginable poverty. All they had to sell tourists
was equipment looted from the army. We bought a pair of leather boots
for one US dollar. Best buy we ever made. We still wear them, 20 years
later. Two weeks ago they kept us from losing a leg, when we slipped
while cutting up a tree with a chain saw. The saw cut into the boot but
didn’t even scratch our leg.
Why is this little discussion of government spending important? Because
it is ‘the rest of the story.’ Economists are pushing government
spending as a substitute for private spending…and government jobs as
a replacement for jobs lost in the private sector. Nearly 5 million
jobs were lost in 2009 – almost every one of them in the private
But here come the feds to the rescue:
Pending house sales went down in November. Yahoo Finance wonders
whether we will have a “double dip” downturn in the housing market.
Yes, we answer, most likely we will.
In The Daily Telegraph newspaper in London, Ambrose Evans-Pritchard
does a remarkable job of chronicling the fads and foolishness of the
post-bubble world economy. He sees some excitement coming in Japan:
“The shocker will be Japan, our Weimar-in-waiting. This is the year
when Tokyo finds it can no longer borrow at 1pc from a captive bond
market, and when it must foot the bill for all those fiscal packages
that seemed such a good idea at the time. Every auction of JGBs will be
a news event as the public debt punches above 225pc of GDP. Finance
Minister Hirohisa Fujii will become as familiar as a rock star.
“Once the dam breaks, debt service costs will tear the budget to
pieces. The Bank of Japan will pull the emergency lever on QE. The
country will flip from deflation to incipient hyperinflation. The yen
will fall out of bed, outdoing China’s yuan in the beggar-thy-neighbour
race to the bottom. By then China too will be in a quandary. Wild
credit growth can mask the weakness of its mercantilist export model
for a while, but only at the price of an asset bubble. Beijing must hit
the brakes this year, or store up serious trouble. It will make as big
a hash of this as Western central banks did in 2007-2008.”
for Markets and Money