Clowns to the left of us…jokers to the right…
The Simpleton’s Analysis:
Consumers cut back. The economy sank.
Now, government must take action. It must help people out and take up the slack.
The downturn took $12 trillion off Americans’ net worth. The feds have pledged about $12 trillion to fix the problem.
But wait, where does government get any money?
Hey, they borrow it, just like consumers did. And besides, it’s ultimately the same money – taxpayers’ money. So what’s the big diff?
The big diff is the subject of today’s Markets and Money.
The first big diff is that the feds don’t spend your money the way you would. Private citizens spend money they don’t have on things they want but don’t need. The feds spend money that doesn’t belong to them on things that the rightful owners don’t even want.
Wait a minute. Markets were closed yesterday. With no figures to report, we should talk about something important. What’s important about macroeconomics? Nothing. It’s 95% claptrap. The other 5% is pure fraud.
At least as practiced by the leading macroeconomists of our time – such as Ben Bernanke, Tim Geithner and Larry Summers. It’s just a show-off sport…the idea is to impress the world with some fancy data-heavy formula…win the Nobel Prize and save the world. That way, you get what all men crave…money and power. Why do men (and women) want money and power? Aww, c’mon…we explained it already. Because it improves their chances of survival and procreation. In a DNA study, for example, they found that Genghis Khan, today, has something like 6 million male descendants. Is that success or what?
The great Khans of today are no longer the steppe warriors on horseback. They’re basketball players, rock ‘n’ roll stars, actors, and hedge fund managers…and, oh yes, occasionally – economists.
The link between economic theory and procreation is probably very weak; but that doesn’t stop economists from wanting to strut around and show off. And the way for an economist to show off is to get himself appointed to the President’s Council of Economic Advisors…or to the central bank…or get a professorial post at Princeton…etc. etc. This you do by producing tomes, formulae and hypotheses. And, don’t forget to write a piece for The Wall Street Journal from time to time.
Another important hint: your work has to suggest that you can manipulate the business cycle, control the credit cycle, or generally make things turn out the way people want.
If you are a Markets and Money-type economist, you can forget fame and fortune completely. Who wants to hear from a macroeconomist who tells people to leave well enough alone…and to let the forces of natural economics sort out their own problems? No one…at least no one who is running for public office. Instead, they want someone who will promise to “Save the World.”
Save the world from what? Why…from the damage done by other economists!
Two generations of American economists thought the way to bring prosperity was to encourage consumption. On the face of it, the idea is absurd. Classical economists…and Markets and Money commentators…laugh at the idea. You don’t really get rich by consuming; you get rich by saving and investing.
But they had their charts and graphs…their theories and their jobs teaching economics at prestigious universities. Naturally, they had the feds’ ears too – since every politician wants to promise more consumption. The feds favored home ownership, for example…even by people who were bad credit risks. They set up Fannie and Freddie to make it easy for people to buy houses. They even passed a law requiring banks to lend to people who weren’t likely to pay them back; that was the origin of the sub-prime mortgage market! They kept interest rates low, too, so people could borrow at affordable rates. And they inflated the currency, so consumers would want to spend their money rather than save it. They also opened the world to free trade, so Americans could buy more, cheaper stuff made by foreigners. For 50 years, they cultivated consumption and let production go to seed.
And now…wouldn’t you know it…Americans have over-consumed. Personal expenditures per capital rose 25% between 2003-2005. Personal debt soared to over $13 trillion…about $124,000 per household. Total debt/GDP tripled since 1980.
And now, it’s payback time. The private sector has cut back. Consumers need to under-consume to make up for the over-consumption of the bubble years. Savings rates are rising. Spending is falling (see below)…
And so what do the simpletons do? Private citizens are unwilling to consume…so they push the government to consume their money for them!
for Markets and Money