Alasdair Macleod – February 18, 2013
Governments have refused to accept the necessity of a period of economic re-adjustment following the credit-bubble. The bubble burst about five years ago and economic progress has been effectively suspended ever since. The consequences of this refusal to accept reality are at a minimum to make this adjustment unnecessarily drawn out and needlessly painful, without offering a better eventual outcome.
Reduced to its bare bones, the choice has been either to accept that unviable businesses and over-extended banks must go bust, or to ignore the problem and hope it goes away. We are familiar with this dilemma as investors: a business that refuses to adapt to new realities will eventually fail. Before it does, its investors have the chance either to sell their shares and perhaps reinvest their money more profitably, or to refuse to accept an early loss on their investment. Most of us, being human, take the latter course and usually regret it.
The lesson, if we care to learn it, is that the product of time and money is more valuable than the desire to avoid a book loss. In economic terms, it is better for resources to be deployed efficiently than to tie them up in inefficient or unwanted activity. This is a decision for markets, not governments, which brings us back to the necessity for economic re-adjustment. Governments have simply not faced up to the reality that we are in a post-credit-bubble mess: they still hope the problem will be resolved by time.
At this point we must dismiss objections that you cannot compare national accounts with those of a business. Such platitudes display wishful thinking more than a grasp of reality. However, wishful thinkers have a minor point in that governments have the wherewithal to put off the inevitable for longer than failing businesses; but the result is the zombie-like economy we face today.
Governments are refusing to let markets clear: prices have not been permitted to fall to a clearing level. They put it off because the American economist Irving Fisher came up with a plausible theory about financial deflation in the 1930s, and they don’t want to face the bankruptcies of the over-indebted, the businesses that rely on the state for their survival, and the banks that have foolishly lent them too much money.
Reality is now catching up with western governments. Their underlying financial position is rapidly deteriorating, with welfare costs spiralling out of control and governments already heavily in debt. They cannot realistically underwrite the global banking system, which is insolvent and considerably larger than the governments themselves. The economic recovery which is the governments’ get-out-of-jail card will not occur without that economic readjustment.
We are long past the point of no return: that was probably when the Federal Reserve Board under Greenspan decided to rescue the stock market by cutting interest rates to 1% in 2003/04. It has been crisis management by the state ever since. We have progressed to the point where governments have chosen to protect themselves, in preference to looking after the true interests of their electorates.
Governments are now reduced to screwing their electorates for their own survival, which is their last refuge from reality.