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LOOSE MONEY
By James R. Cook
The policy of easy money and credit expansion employed today by the U.S. must eventually produce a depression. So it was taught by Ludwig von Mises and the Austrian economists and so it has happened again and again. A boom engineered by monetary and credit expansion cannot last. As we are seeing now, it inevitably comes to a bitter end.
Nevertheless, the monetary authorities continue an aggressive policy of loose money. They maintain interest rates at artificially low levels, monetize government debt and pump money into the banking system. So far, monetary easing has failed to re-ignite the boom. A titanic struggle exists between the free-market forces of contraction and the government-sponsored forces of expansion. Only one thing is certain, there’s no good outcome. We will all be the poorer for it.
Artificially low interest rates discourage saving just as high interest rates cause people to save more. Low rates also cause an increase in borrowing and debt. As we have seen, much of this borrowing goes into speculative ventures and highly leveraged investments that otherwise would not exist. These policies cause thrift, savings and capital investment to plunge while spending and consuming explode.
Our economy has been living on booze and pills. We can drink another fifth and smooth things out for awhile. But our deep-seated problems can’t ever be permanently resolved without pain. That’s the thing to understand about the U.S. economy. It’s dysfunctional. The debt and the deficits are addictions we can’t stop and we’re continuously taking bigger doses. Unfortunately, we’re going to hit the gutter someday.
In his latest newsletter, Dr. Kurt Richebacher gets to the nub of our predicament. I’ve taken the liberty of condensing some of his views.
“The total carnage of national savings is the U.S. economy’s most important – but also most widely ignored – predicament. Saving, in actual fact, is the indispensable condition for economic growth because it releases the resources that can be used to produce plants and equipment, adding to the nation’s capital stock. Saving is the indispensable, vital condition that provides the necessary means of investment. A country without such savings is a country without the possibility of capital formation. Manifestly, the United States has become such a country. Ever since Adam Smith, savings has meant exactly one and the same thing in all languages: it is the part of current income that is not spent on consumption. To pin down and emphasize the key point: savings from current income represent the economy’s supply of capital.
In the U.S. national savings have been squandered to pay for spending that the consumer cannot afford from his current income. Such massive dissaving is a profoundly destructive phenomenon. The inherent damage to the economy’s whole structure arises from the fact that it fosters an ill-fated, unsustainable diversion in the economy’s whole demand and output structure towards consumption at the expense of investment.
The U.S. economy’s growth structure has been literally devastated in the past few years. National saving, net investment and profit margins are at all-time lows. Their malignant counterparts are a record-high share of private consumption in GDP and soaring foreign indebtedness. The widely expected U.S. economic recovery is unlikely to materialize without a prompt and strong recovery in business fixed capital investment and housing. Yet current conditions make recoveries in these sectors virtually impossible.
Slumping business investment spending translates into slumping employment and consumer incomes. So far, though, the consumer has largely offset this income squeeze by stampeding still faster into debt. For the time being, this has certainly prevented much worse from happening. But it definitely lacks the necessary thrust to jump-start a recovery. For that to materialize, it requires without question the return of rather strong growth in business fixed investment – which in turn depends on sufficiently positive profit prospects. The consumer’s confidence in the future is grossly misplaced. Monitoring underlying economic and financial conditions, our conclusion is that the high-riding confidence of the American consumer is in for a devastating shock.
The first thing to get straight is that this was – and still is – the most outrageous bubble economy in history, far worse that the U.S. bubble of the 1920s and Japan’s bubble of the late 1980s. In terms of quantity of money and credit creation, the Fed’s easing has been a sweeping success. But in terms of its effects on GDP, national income and the financial markets, it is an outright disaster. These are, of course, the only effects that matter. The bear market and a major recession are only just beginning.
Prolonged, extreme monetary looseness created multiple bubbles both in the U.S. economy and in its financial system. The most obvious and spectacular among them was certainly the Nasdaq bubble. But the biggest more terrifying bubbles are the consumer bubble, the bond bubble and the dollar bubble. All three have yet to pop, and when they do, they will wreak unprecedented havoc on the whole U.S. financial system because all three of them are addicted to permanent, limitless debt creation. Eventually, a point is reached where the financial system is unable to create the ever-greater credit requirements to keep these bubbles expanding.”
As for the dollar, Dr. Richebacher adds this worrisome comment. “The grossly overleveraged U.S. financial system requires a strong dollar and permanent, huge capital inflows. The U.S. trade deficit and the accumulated foreign indebtedness have reached a scale that defies any possible action by central banks. The fate of the dollar is out of any control.”
It’s important to appreciate and understand this clear-thinking economist who makes dire predictions for the U.S. economy. He has been uncanny with the accuracy of his predictions over the past few years. If he continues to be right, we have a difficult time ahead. The monetary authorities can lose control here. A vicious contraction can devastate the economy. This can easily become worse than anything we’ve known in our lifetimes. Start thinking about a financial crisis. Right now it’s not just possible it’s probable.
