Monday, April 08, 2013

This is the Worst Trade Off – Ever

By Harry S. Dent, Jr., Editor, Survive & Prosper

Dear Al,

‘I was just watching a financial news show where the issue of the day was why the government’s fiscal policies are at odds with the Fed’s monetary policies.

The Fed is attempting to stimulate the economy by injecting $85 billion a month into it… money it’s conjuring “out of thin air.”

And government is cutting $85 billion a year… or about $7 billion a month.

So, according to the show, government is in an anti-stimulus mode while the Fed is in a strong stimulus mode.

What?!?

THIS is one of the reasons you shouldn’t pay much attention to what the mass media says!

The government has run a $1 trillion plus deficit in good times since 2009. That deficit climbs to $1.5 trillion in bad times like 2009, and there are more of those years coming.

Hello! When the government spends more than it earns to offset downturns in the private economy, that’s the very definition of Keynesian fiscal stimulus.

Cutting $85 billion a year? That’s like saying you’re going to drink one less sip of beer from each bottle every night… or eat two less chips out of the bag. And in ALL three cases…

Somehow none of it ever happens.

For the government to cut its deficit by $85 billion is like the Fed saying it’s going to cut its stimulus efforts from $1 trillion a year back to $900 billion. So what?! That’s still the greatest ongoing monetary stimulus in history.

The government is not working at cross odds with the Fed. They’re partners in crime.

Here’s the reality…

It’s taking $2 trillion in stimulus, $1 trillion fiscal from the government and $1 trillion in monetary from the Fed, to create a paltry $300 billion, or 2% growth (on average) in GDP.

That is a horrible trade-off.

How long do you think we can keep this up before everything just blows apart?

Why not just give the $1 trillion in QE directly to consumers? That would get us 7% growth. Or why not give the banks $1 trillion on condition that they write off the 3 to 4 times that amount in consumer and business loans and cushion their inevitable losses. That would free up about $400,000 a year in cash flow for consumers and businesses for decades to come. That’ll stimulate real growth.

The problem is that most politicians, the Fed, and most economists assume that if we can just stimulate long enough to get over the subprime and debt crisis of 2008, the economy will get back to normal and grow 3% to 4%... We’d get back to a happy place where we have just 1% to 2% inflation.

What are these people smoking?

With the largest generation in history falling in spending – a phenomenon that will only get much worse after 2014 – and the greatest debt bubble in history simply dying to deleverage, there is no way in hell we are getting back to normal!

It will be around 2023 before our economy grows at sustainably higher rates again, naturally, without massive stimulus or life support. That’s when the echo boom generation moves into their peak spending years. And even then, the impact they’ll have on the economy won’t come close to that of the baby boom from 1983 to 2007.

If we continue down this path, and run $1 trillion plus fiscal deficits in good years and $1.5 trillion plus in bad years, then by 2023, when the economy does turn back to “normal,” we’ll have a government debt of about $30 trillion (and I’m being a bit conservative here).

If the Fed keeps pumping $1 trillion plus a year into the system, then its balance sheet will grow to $14 trillion plus (and that’s not taking into account the fact that it’ll likely have to accelerate its stimulus efforts to keep us at 2% growth as demographic trends only get worse).

That’s $44 trillion in government debt.

That’s 290% debt-to-GDP, counting QE, which is debt.

That’s where Japan is right now (counting government debt and QE).

They’ve already been down the path we’re on. Look where it got them? As John Mauldin so eloquently puts it, “They’re a bug looking for a windshield.”

And when the likes of mainstream economists, Paul Krugman, go on television to say Japan can solve its problems if it just stimulates enough… that we can solve our problems if we just dig bigger deficits of our own and increase the size of the QE flow… it makes me spitting mad. Has this bearded guy ever had sex or run a business?

If John Maynard Keynes could see how governments have abused his theory, he’d be turning in his grave.

We’re addicted to debt. Have been since the early 1970s. And now we’re using the same justification every addict uses when they don’t want to quit. Keep the drugs coming… that way we won’t feel the pain when we come down from the high.

Only, we WILL come down. It’s inevitable. No system (physical or otherwise) can function for prolonged periods under continuously high stimulus.

Get ready for a deeper debt crisis between 2014 and 2020, with the next shock, larger or smaller, likely into 2014.’

Harry

‘P.S. And do yourself a favor… question EVERYTHING those mainstream “experts” say. I do.’