Economic Laws Are Not Optional

Submitted by Monty Pelerin of Economic Noise blog,

Economic laws are not optional. They are like the laws of physics – inexorable!

Economic laws are less precise in terms of their timing and effects, only because they deal with human behavior rather than physical particles. Human beings alter their behavior to cope with changing conditions. Particles do not. Free will and the survival instinct make prediction, especially regarding timing, very different and difficult in the human realm. Nevertheless, the laws are immutable!

Long-time readers of this website know that no recovery is possible given past and current economic policies. Initially, it was argued by some that government intervention was necessary and would effect an economic recovery. By now, even the dullest of Keynesians know their policies failed. Yet they continue.

Why would failed policies continue? The political class argues for their continuance, but not on the basis of sound economics. Their arguments are motivated by political self-interest. The appearance of a recovery is more important for politicians facing another election or a legacy than the damage being done to the economy. Remember when the focus of the Clinton campaign against George H. W. Bush claimed that it was the worst economy in fifty years? That was not true, but it was effective.

Stopping the Federal Reserve juice threatens what remains of our economy. No one wants to be known as the “new Herbert Hoover,” although someone will inevitably be tarred with that association.

Early Warnings

This website began in September 2009 recognizing the futility of applied economic efforts to “cure” the problem. The very first post appeared on September 7, 2009 and was entitled No Exit From Economic Mess. To put matters into perspective, the government claimed the recession had ended in June of 2009. This economic lie was apparent to anyone who had a modicum of economic understanding or common sense. The more of the latter one possessed, the less of the former was required.

Over time I have come to believe that the two types of knowledge may now be incompatible — a sad commentary on how the economic profession has been hijacked by the political class. A good rule of thumb is to ignore any economist who is involved in politics. Unfortunately, with government grants, that includes much of the profession, including those never directly employed by government.

The first paragraph of that very first post stated the following:

Doug Noland of www.Prudentbear.com has it right on his “No Exit” Possible scenario. Our economy has become totally dependent upon government spending, interventions and subsidies. There is no recovery in the private sector, nor is there likely to be one in the next several years. Federal meddling will continue to create distortions that will require additional and continued meddling. From a political standpoint, there will be no good time for an exit. However, at some point, the system will not be sustainable. Markets will eventually end the meddling regardless of whether it is politically or economically feasible or timely. When that happens, our lives and economy will never be the same again.

On that same day, there were six other articles suggesting that no economic recovery was possible until policies and conditions changed. Links to them follow:

1. Stocks Divorced From Real World

2. Banking Mess where it was said:

Enron-type accounting is allowed to enable banks to keep exposure on non-consolidated subsidiary books. Banks are allowed to value assets at whatever they deem them to be worth rather than accounting standards that have been in place for centuries. Condoning this fraud may defer the political problem. It cannot solve the economic problem and likely makes it unsolvable at some point. Market forces will eventually overwhelm the charade, and put our entire economic system at risk of implosion.

3. Timely Economic Analysis from Dilbert???? The Dilbert cartoon provided a possible reason why economists find it easier to bring good rather than bad news:

It appears that the writer of Dilbert is a better economist than many Nobel laureates who are proclaiming “Green Shoots.”

4. The Banking System, The Dollar and The Welfare State stated:

There is no mathematical possibility of escaping the economic bind we face without reducing the welfare state. The current financial crisis only exacerbates a situation which long ago passed the tipping point. The Federal government’s total liabilities exceed $100 trillion (most of that from the unfunded liabilities of the welfare state: social security, medicare, etc.). With the financial crisis, we now have an additional black hole, our banking system. The condition of the banking system has been covered up, but that is becoming harder and harder to do as banks collapse under their own weight as a result of deteriorating conditions.

5. The Crash Course by Chris Martenson presented his ideas of how the policies were economically foolish and mathematically impossible to continue.

6. Moral Hazard Destroys Social Capital and Cooperation discussed the corrosive moral effects of an immoral government:

When the “game” is perceived to be corrupt and exploitive, it is easy to rationalize immoral behavior at the level of the individual. Contracts, promises and obligations start to become meaningless. For many, the phrase “is it legal?” replaces the phrase “is it right.” Loopholes in the law trump ethics. Soon even the law becomes less of a barrier as cheating and stealing become acceptable for some.

These were posts on the inaugural day of the website. The passage of time has not changed anything, except the understatement of some of the problems from the first day. The post regarding stock market valuations was arguably incorrect as the market recovered nicely from that point. However, it is valid today, more so than ever. Almost five full years from the date of these posts, there is less reason for optimism. The economic structure of the country has been further weakened.

The declaration that the recession ended was a lie. Polls show that a majority of the population now agrees we never left the recession. Zerohedge referred to a recent article by Eric Sprott to provide an up-to-date assessment of conditions:

As Eric Sprott points out in his latest letter, “if one looks past headline figures, things are not really getting better. As shown in Figure 1, real disposable income per capita in the U.S. has increased only modestly since the Great Recession. However, all of this increase is due to Government Transfers, not from an improvement in the real economy. If we exclude those transfers from the numbers, disposable income per capita is actually lower than it was at the end of 2005 and has been painfully flat since 2011. Also, those numbers assume that the headline Consumer Price Index (CPI) accurately represents people’s purchasing power.”

Presenting our chart of the day: disposable income with and without government transfers.

And it is not just disposable income: as Sprott explains, “the U.S. economy has been on life support, graciously provided by Central Planners. However hard they try, they will soon realize that no amount of money printing can cleanse the rot of the U.S. economy.”

Here is why for a large portion of the population, “things are not anywhere close to being better, in fact they are worse than before the recession.”

Nothing Has Changed

The smoke and mirrors obfuscating true economic conditions for five years has been deliberate. The economy has not recovered. It has been made more distorted and imbalanced by the futile attempts to pretend that all is well. Government has more smoke and mirrors left. Yet, even the political class now seem to sense that they are playing out the clock without altering the ultimate conclusion. When your time frame is limited to the next election, longer-term consequences of current policies are ignored.

The economic piper will be paid. All that has been accomplished by these actions is a deferral of the correction and the creation of a bigger debt upon which the piper will collect. The warnings expressed on the first posts on this website are as relevant now as they were five years ago.

A massive political cover-up of the true condition of the country has been accomplished at the cost of making underlying economic conditions worse. The economy is no longer growing and people are becoming poorer as a result of the political shenanigans used to hide the true conditions. As expressed in the very first post:

There is no recovery in the private sector, nor is there likely to be one in the next several years. Federal meddling will continue to create distortions that will require additional and continued meddling. From a political standpoint, there will be no good time for an exit. However, at some point, the system will not be sustainable.

Zerohedge’s recent assessment of current economic conditions indicates that matters may be progressing rapidly toward this end:

Despite the best efforts of The Fed, its apologists, and the commission-taking talking-heads to persuade the world that the US economy is picking up and set to reach escape velocity any minute… the fact is, the US economy (judged on data not fantasy) is hurting. Consensus expectations for 2014 US GDP growth have collapsed from over 3.00% to a mere 1.7% now. But what is more critical is the incessant bleating that data is picking up and suggests a 2nd half recovery… it doesn’t.

The inevitability of what is coming is what is important. The timing remains uncertain. It need not occur in the next week or month. Timing may still be measured in years, but the outcome is more certain today than it was five years ago. The laws of economics make it so. Any geopolitical or economic misstep could trigger the event. Without such a misstep, the charade could continue for a while.

A collapse is coming. It is unavoidable and will be worse than it should have been as a result of political duplicity.