Saturday Morning Essay: The Hall of Mirrors Economy

Once upon a time in a blog post far, far away, I made a prediction which was stunning in both its scope and later accuracy. I wrote that the stock market would fall at least 35% from its 2007 Dow high of 14,000.  I made this prediction long before the stock market started falling.  As it turned out, the Dow "over-corrected" and kept heading south from 9,000 or so.

My prediction was based mostly on a single data point which I had gleaned from the writings of Kevin Phillips, in books he published in 2004 and 2005.  Perusing this very intelligent man's writings, I was struck by the essential role which the Housing Bubble played in the maintenance of the "consumer economy" which gave the United States its illusion of prosperity.  Mr. Phillips informed us that between about 2000 and 2005 about half the apparent "income" fueling the consumer jamboree was actually money derived from re-fi, house sales, and equity lines of credit (LOC); in other words, the house as piggy bank.  Since it seemed to me that the Bubble could not be sustained (because it depended on financing tricks such as "teaser rates" and variable interest loans which would reset and bring reality crashing down on the borrowers), when it popped about half the money apparently in circulation would vanish.  Since consumerism is 70% of the American economy, this implied a 35% drop in the economy.  To the extent that the Dow reflected underlying economic fundamentals, it would show up there as a massive sell-off.

My ideas were not based on "conspiracy theories;" indeed, I was trying to find, to the limits of my ability, the underlying Reality of the U.S. economy.  Meanwhile, the Grand Poo-Bahs of the intellectual elite in America were doing their best to confuse the issue.  This effort was led by the New York Times and its Gaggle of Morons in the Op-Ed department.  Maureen "I Hate Men" Dowd, Tom "Globalization" Friedman, Paul "Just Print Money & We'll Be Fine" Krugman, David "Even If In the Middle Is Over the Cliff, That's Where I Want to Be" Brooks, Gail "Here's Another Fatuous Column" Collins, and their ace staff of reporters who provided the echo chamber for the Bush Administration's sale of the Iraq War.  As Bob Somerby, he of the felicitous turn of phrase and nice fall-away jumper, put it in The Daily Howler, "We are where we are because of these people."  The moral of the story is straightforward:  Just listen to varsity basketball players from the Mid-Peninsula League of the mid-1960's and you'll be fine.

Paul Krugman and his academic chum in the Princeton Economics Department, Ben Bernanke, failed to see the housing bubble until it was much too late.  Since Kevin Phillips is not one of their Economic Mandarins, they thought he could be safely ignored, even if Phillips was much smarter than both of them put together.  As the housing bubble burst, Ben Bernanke was assuring Congress in live testimony that it was not bursting.  Few men have been so utterly wrong about something so fundamental in such a public way.  His chagrin at his stupendously wrong call must have produced a determination in Bernanke that history could be reversed, as in a sci-fi movie, and he could re-engineer the housing bubble, the stock market bubble, and, for that matter, the Bubbles of Lawrence Welk and the Champagne Orchestra.

Cheered on by Krugman & the Morons, Bernanke began printing money and becoming a one-man enabler of profligate federal spending by buying up every Treasury bond he could find and scarfing up all of the country's shitty loans smooshed together in mortgage-backed securities (MBS).  Goddammit, he muttered, I'll show them.  Krugman provided the intellectual cover for this insanity by insisting that the ultra-low rates paid by the federal government had nothing to do with the Federal Reserve's role as the ultimate buyer of 75% of the Treasury issuance, or as establisher of the nation's short-term interest rates.  Nothing to do with the Fed's position now as the world's single largest holder, by far, of Treasury bonds.  And as for printing money, the U.S. economy is exactly like a baby-sitting co-op in Washington, D.C., so there's no problem.  Go ahead: google "Krugman and baby-sitting co-op" and see what happens.  I dare you.

Thus, Tom Friedman, perhaps the stupidest influential writer in the history of the Republic, gave us globalization, that Royal Road to Perdition on which we have traveled since about 1980.  And Krugman has given us the The Return of the Bubbles.  Bob Somerby:  nuthin but net. 

Fortunately, we have Gail Tverberg, writing at Our Finite World, to provide much needed doses of clarity and common sense.  In one stunning post (her latest), entitled "Twelve Reasons Globalization Is A Huge Problem,"  she dispenses with the illusions of globalism and money-printing in two simple paragraphs:

 At this point, high oil prices together with globalization have led to huge US deficit spending since 2008. This has occurred partly because a smaller portion of the population is working (and thus paying taxes), and partly because US spending for unemployment benefits and stimulus has risen. The result is a mismatch between government income and spending (Figure 11, below)...

Thanks to the mismatch described in the last paragraph, the federal deficit in recent years has been far greater than the balance of payment deficit. As a result, some other source of funding for the additional US debt has been needed, in addition to what is provided by the reserve currency arrangement. The Federal Reserve has been using Quantitative Easing to buy up federal debt since late 2008. This has provided a buyer for additional debt and also keeps US interest rates low (hoping to attract some investment back to the US, and keeping US debt payments affordable). The current situation is unsustainable, however. Continued overspending and printing money to pay debt is not a long-term solution to huge imbalances among countries and lack of cheap oil–situations that do not “go away” by themselves.

Krugman and Bernanke will never admit that a plain-spoken insurance actuary from the Midwest can run circles around them analytically, and so we'll continue crashing into walls in our Hall of Mirrors Economy, which will stagger along for a while yet (as long as the U.S. has the reserve currency and the rationale for buying our scrip in order to participate in the global oil market persists).  But, as Gail says, "it's not a long-term solution."  We don't have any long-term solutions.  Take it from the two-guard.  I've got a clear look at the hoop, and this one's money.