America missed an asteroid. It dodged a depression. It sidestepped the Mayans’ ‘end of the world’ curse. But the ‘sequester’ strikes Planet America.
The Dow was heading for an all-time high based on two rationales.
First, housing seems to be in a real recovery. Here in Delray a business partner told us:
‘It’s unbelievable. Prices are almost back up to where they were before the crisis. I used to buy houses and apartment buildings for five times rental income. That was a good deal. But now, I can’t get those deals. Too many buyers in the market. But Delray is special. It’s a very strong market.’
The second rationale for a stock-market boom was announced by Ben Bernanke. He’ll keep printing money, he told the Senate, come hell or high water. Whichever comes first.
When Congress passed the Budget Control Act of 2011, it kicked the can down the road…to the 1 March 2013. That’s when the dreaded ‘sequester’ was supposed to happen. Automatic US government budget cuts are meant to be triggered… cutting off ‘demand’ for certain public and private services.
To hear some in the press and the government describe it, this sequester will be the end of life as we have known it. The feds will lack money for the basic services that maintain civilised life.
After today, the borders will be opened…terrorists will launch an assault on Washington… old people will drop dead in hospitals…cancer cures will be abandoned…troops won’t be fed…
…and worst of all…the zombie apocalypse will begin…with millions of zombies marching on Washington in search of money they never earned…
Well, you know that this is nonsense. But you may not realise how preposterous it is. Even with the sequester, spending still goes up. The difference between the sequestered budget and the non-sequestered budget is trivial.
For Krugman, Bernanke, Stiglitz et al, the worst thing that can happen to an economy is a fall in ‘demand’. And they see it coming!
The sequester reduces ‘demand’ from the federal government. But that is a good thing. When the Depression of 1920-21 struck, presidents Warren Harding and Calvin Coolidge had no Nobel prize-winning neo-Keynesian economists to help them.
So they had to use common sense. They simply cut the burden of government – reducing taxes and cutting (sequestering) government spending. Result? The Depression was over within two years. Full employment was restored. GDP roared ahead.
But today’s leading economists are convinced that they know better. They believe ‘sequester’ means less demand. And less demand is bad.
Meanwhile, on the front page of the Wall Street Journal, more mushy thinking. Describing Japan’s economic problem:
‘…the country’s economy is stagnating because prices are stuck at 1980s levels.’
Prices are ‘stuck’. Is that any different from saying prices are stable? No, it isn’t. In Japan, consumer prices are about the same today as they were 30 years ago. According to the sages at the WSJ, that too is a bad thing; it causes economic stagnation. Why? Because it cuts demand!
Oh dear, dear reader…only a person who has studied economics could believe such a silly thing. In America especially, the economics profession has led itself into mush. It believes that what really matters is ‘demand’ and that rising prices encourage it. It also believes that the role of policy makers is essentially demand management.
When prices go up, people don’t want to save…and don’t want to wait. They know they’ll get their best deal now. So, they spend. Demand increases.
Rising prices also mislead investors and households on the other side of the ledger. They see their investments going up. They see their income rising. They figure they can spend more. Demand increases.
Anyone who thinks about it seriously knows that there is more to a good economy than just demand. Spending isn’t what makes a healthy economy. It’s saving. Building capital. And using the capital to earn profits and pay wages.
Demand is what you get as a result of saving and investment…not the other way around. There is no real demand, in other words, until you have wealth. Wealth allows you to spend. Real demand goes up.
But if you try to push up demand without adding real wealth you are just wasting your time. Or worse, you’re tricking everyone in the economy and causing them to make mistakes.
Which brings us back to prices that are ‘stuck’. Stable prices are a good thing. They make it easy to tell where you are and where you’re going. If, for example, your income is ‘stuck’ and your wealth is ‘stuck’…then you should be stuck too. Spending more money you don’t have is not the way to un-stick yourself.
Sequester? Bring it on!
for The Daily Reckoning Australia
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