Luongo: Government Intervention Is Always, Without Fail, The Wrong Response To Economic Problems

Authored by Tom Luongo via Gold, Goats, ‘n Guns blog,

Government intervention into the market is always, and without fail, the wrong response to an economic problem. Politicians justify their intervention with ‘saving jobs,’ ‘dealing with a crisis’ or simply, ‘because I can.’

They only focus on the ‘seen’ and ignore the ‘unseen’ effects of their policies, selling them to voters on that basis alone. This is the first rule of economic analysis.

The great Frederick Bastiat described this in his seminal work of 1850, ‘That Which is Seen, and That Which is Unseen”

No discussion of the secondary or tertiary effects is allowed.

Even though those effects are often far worse. But because they are harder to predict and more pernicious and diffuse they are ultimately ignored.

President Trump is no different in this than any other politician. In fact, he may be one of the worst examples of a politician doing too much in history. To Trump nothing cannot be fixed without his direct application of the weight and force of the U.S. government.

From sanctions to tariffs, stimulus spending to bailouts, Trump has become the WWE Version of FDR in the past month. The latest bailout to the oil industry Trump is proposing is paying drillers to leave their oil in the ground.

The Energy Department has drafted a plan to compensate companies for sitting on as much as 365 million barrels worth of oil reserves and counting it as part of the U.S. government’s emergency stockpile, said senior administration officials, who asked not to be identified describing deliberations prior to a decision and announcement.

Federal law already gives the Energy Department authority to set aside as much as 1 billion barrels of oil for emergencies — without dictating where they should go. That creates a legal opening for storing crude outside the government’s existing reserve and even blocking its extraction in the first place.

The keep-it-in-the-ground plan, which would require billions of dollars in appropriations from Congress, could be unprecedented and reflects a Trump administration push to help domestic drillers battered by a surge of oil production and a collapse of demand tied to the coronavirus.

I’ve warned for years that Trump’s policies of antagonizing the world would come back to bite him. The frantic response by his administration to the breaking of the world financial system through the collapse in oil prices is precisely because he pursued his “Energy Dominance” policy which sought to make America the price-maker in oil versus being a price-taker.

It put the U.S. in the vulnerable position it was in in March, having spent trillions in ramping up domestic production while attacking competition around the world — Russia, Iran, Iraq, Venezuela.

Everyone saw the charts of U.S. oil production go vertical. Most everyone didn’t see the cumulative negative free cash flow generated by the industry doing the same thing, quarter over quarter.

Trump’s “Best Economy Ever” was built on a foundation of quicksand and now he’s scrambling to prop it up before it sinks into oblivion.

He put himself in this position with his insane and ridiculous belligerence in foreign policy around the world. If you don’t think Putin’s decision to say no to OPEC+ production cuts in March which precipitated this collapse wasn’t a direct response to Trump’s lunatic antics in Iraq, Syria and Iran then you are either willfully obtuse, a moron or both. (I told you in my last article I’m done mincing words).

He put himself in this position by intervening in the oil markets at every level and now the worm has turned on him.

For most of 2019 we wondered what the world would look like at $200 per barrel oil in the case of a U.S. war with Iran. But the truth is it would look a helluva lot like the world today at $20 per barrel.

And it’s not going to improve anytime soon. Trump is right to push to open the U.S. economy up regardless of the status of COVID-19 because the best way to save the oil industry is to get people working and raising the demand for oil.

The U.S. had a grenade dropped on its budget. It looks like a nuclear bomb, but that’s only because of the continued arrogance and necessity of politicians, like Trump, needing to be ‘seen’ doing something caused far more damage than it would have if they hadn’t intervened in the first place.

The adage, “never let a crisis go to waste,” is apropos here. Politicians use the cover of crisis to act. They have to be ‘seen’ acting rather than not. Trump is acutely aware of this because he truly can’t stand criticism.

A man without principles, Trump acts mostly out of his need to deflect criticism and be ‘seen’ by his base as their champion.

You could argue this ‘pay-not-to-drill’ plan is Trump’s way of getting around agreeing to production cuts with OPEC+ publicly, but that would be giving him far too much credit (more of that willful obtuseness I mentioned earlier)

But, really this is just another ridiculous bailout no different than FDR paying farmers not to plant (which we still do nearly 90 years later) and burning crops while people were starving.

And the unseen effects of these bailouts and alphabet soup programs of asset purchases will be the final wholesale looting of what once was the engine of the U.S.’s economic greatness, the middle class.

Trump thinks he’s saving middle class jobs here but he’s destroying them. These were jobs that should never have existed in the first place. Extending them into the future only prolongs the agony while the money spent mostly goes to the vultures hanging around D.C. to save themselves.

The fact that every action taken so far by the Trump administration to counter the effects of the deflationary spiral set off last money has been to bail out someone else, tells you no one in D.C. is even paying lip service to the unseen effects of their actions.

Moral Hazard? We don’t have time for that!

And the people surrounding Trump, including Trump himself, know this and can’t help themselves.

This is not an economic one but rather a crisis of confidence and faith in the role of government. This is why they are acting so swiftly, to save themselves, not us.

If they’d get out of our way and let the market clear, which it will do eventually anyway, we could all get back to productive work that much faster.

We crossed the monetary Rubicon last month. From here on out it will be an endless series of Hollywood Red Carpet openings while they further destroy what’s left the discipline of the market and hollow out what’s left of our lives.

The government has always been an economic vandal, obsessed with first-order effects to further is own ends. As the after-effects of this period of history present themselves we’ll come to understand this even more acutely.

By the time Trump and his band of economic ignoramuses are done there won’t be an America worth making great again. That’s the future once seen, you can’t unsee.

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