The Mistake-Correction Cycle of Real World Economics
We went to our last summer soiree last night. It took place at a neighbor's chateau, where a large, ancient stone barn had been transformed into a dining room for 100 people.
"We're screwed...so are you..." said a friend.
First, an update from Wall Street: the Dow was unable to sustain a bounce yesterday. It fell 74 points. Gold dropped $3.
Hiring...house sales...the latest news confirms that there is no real recovery going on. And now this from the AP:
The government is about to confirm what many people have felt for some time: The economy barely has a pulse.
The Commerce Department on Friday will revise its estimate for economic growth in the April-to-June period and Wall Street economists forecast it will be cut almost in half, to a 1.4 percent annual rate from 2.4 percent.
That's a sharp slowdown from the first quarter, when the economy grew at a 3.7 percent annual rate, and economists say it's a taste of the weakness to come. The current quarter isn't expected to be much better, with many economists forecasting growth of only 1.7 percent.
Such slow growth won't feel much like an economic recovery and won't lead to much hiring. The unemployment rate, now at 9.5 percent, could even rise by the end of the year.
"The economy is going to limp along for the next few months," said Gus Faucher, an economist at Moody's Analytics. There's even a one in three chance it could slip back into recession, he said.
In addition, the impact of the government's $862 billion fiscal stimulus program is lessening.
That leaves the private sector to pick up the slack. But businesses are cutting back on their spending on machines, computers and software, according to a government report earlier this week. And the housing sector is slumping again after a popular homebuyer's tax credit expired in April.
"What we're seeing is that the hand-off to the private sector is not looking as robust as we had previously hoped," said Ben Herzon, an economist at Macroeconomic Advisors.
A handoff? What an imagination!
As if the private and public sectors were running a relay...cooperating to make our lives richer and better...based on a game plan developed by the coaches at the Federal Reserve!
We have news: it doesn't work that way.
"Okay, Mr. Smarty Pants, how does it work?"
Glad you asked.
In the real world, the economy is always making mistakes...and always correcting them. Making mistakes...and correcting them.
And markets are always discovering what things are worth. They figure out what one thing is worth, conditions change...and they change their minds.
There are times when the economy makes a big mistake - especially when it is given the wrong signals from the Fed. And there are times when markets change their minds dramatically.
Investors don't like it much when the economy and the markets turn down. It makes them look like morons...which they usually are. Businessmen don't like it much either. Falling sales or failing businesses make them look incompetent and reduce their compensation. The average person doesn't like it because he loses his job...and sometimes his savings. And the politicians don't like it because they pretend to have everything under control; when things seem to go wrong, voters blame them.
So, the politicians - with their lackey bureaucrats and stooge economists - take action. They do something! Newspaper columnists and TV commentators argue about whether they do the right thing or the wrong thing...too much or too little...too soon or too late. But actually, anything they do will be wrong - unless it is merely removing some previous "improvement."
"Wait a minute... Are you saying that all these recovery programs...and raising and lowering interest rates...and providing support for key industries...and help for people who are unemployed... Are you saying all that is a waste of money?"
Oh no, we're not saying that. We're saying it is worse than a waste of money. It makes people doubly poorer - first because of the actual cost of the recovery programs themselves...and second because the programs interfere with the economy's efforts to correct its mistakes and find proper prices.
Even the most apparently benign - and some would say, humanitarian - government interference is far more harmful and costly than people realize. Take jobless benefits, for example. At least they don't do any harm, right?
Wrong! Jobless benefits rob Peter to pay Paul because Peter has a job and Paul doesn't. Why do that? Paul might take his time finding a new job.
There are no new jobs, you say? Don't be ridiculous. There are always things that need to be done. Jobs are like anything else; you just have to find the market clearing price. If wage rates were low enough everybody would have two jobs. But who wants to work for substantially lower wages? No one. Most people will only do so if they have to. As long as he is getting unemployment compensation, Paul doesn't have to.
"Whoa...this is radical...sounds almost subversive. You're saying government shouldn't be involved at all."
"Oh no... We don't give advice here at The Daily Reckoning. We're just saying that if people want to be poorer they should invite as much government meddling as possible.... Get government to make lots of rules and then change them often... Put everyone on the government payroll; turn them all into zombies..."
"Here in France, we always seem to start out with the right idea," continued our friend last night. "At least, it doesn't sound bad. We're trying to correct a problem or make people's lives better.
"So we require towns to have a place where people traveling in trailers can spend the night. Some people live like that. They live in trailers or motor homes...and travel around. And they were causing a lot of problems because they didn't have clean places with water and electrical hookups. So now every town is required to have one of these parks.
"Well it didn't take the gypsies long to figure out that they could live permanently in these parks. So they set up encampments and they live there. And if you believe the press reports, they deal in drugs and stolen property. And when the police went into one of these parks the gypsies fired on them with guns.
"Sarkozy decided it was time to get rid of them. But now the gypsies are protected because they're a minority.
"That's the way it works. Every time you try to do something to help people - like setting up these travel parks...or preventing people from discriminating against minorities - it eventually backfires. People always find a way to twist these things to their own advantage.
"And now I've got a situation that really makes me mad. I rented a small house to a young guy who seemed nice enough. He pays almost no rent. But he stopped working almost immediately. And then he brought his girlfriend to live with him. They don't do anything but lie around all day and use drugs, I think. And play loud, awful music. So, I wanted to get rid of them. But they went to some legal counselor - paid for with my taxes, probably. He told them that the house I rented was not up to legal standards...and that they can force me to put them up in a hotel while I make the repairs. And then I can't kick them out because it will be considered retaliation for their causing me to bring the house up to European rental codes.
"I'm sure that housing codes and protecting renters all sounded like good ideas. But they always find some way to twist them against you."
Enjoy your weekend,
Bill Bonner
for The Daily Reckoning Australia
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
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About the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Comment by Historyrepeats on 31 August 2010:
Bill, the peasants are revolting, but keeping them happy is the basis of civil society. Before our time it was acceptable to crush the weak and the powerless but an underclass grew which started robbing the highways and byways, houses and pretty much any undefended asset. Exporting them to the US was stopped by an inconvenient revolution about tax and representation, so they were moved to Melbourne ( via Hobart and Norfolk Island).
The lesser of evils was stumbled upon, almost by chance because creating wars was not working and lets face it moving these unhappy souls around was not practical. Taxes were distributed to make sure the poor remained poor but not destitute.
In france they were a little late, and a chop fest was enjoyed by a howling mob as they removed heads from the rich and famous.
I am sure you are not advocating the return of widespread destitution to curry the masses into menial jobs that are barely paid, although it is really hard to find a good under gardener these days, and where can you secure an electrician if you are not a miner.
No the answer is still to pay your taxes and thank your lucky stars you were born in a rich country with excellent government services.