Is This a Self-Sustaining Recovery or As Good As It Gets?
(July 3, 2014)
The reality is that nothing has been done to address the structural rot at the heart of the U.S. economy.
Opinions about the U.S. economy boil down to two views: 1) the recovery is now self-sustaining, meaning that the Federal Reserve can taper and end its unprecedented interventions without hurting growth, or 2) the current uptick in auto sales, new jobs, housing sales, etc. is as good as it gets, and the weak recovery unravels from here.
Believers in the self-sustaining recovery have multiple data they can point to: the aforementioned auto and housing sales, and a number of other upticks in fundamentals such as jobs, household income, industrial production and so on.
The basic dynamic in this story is the Federal Reserve had to shoot the patient full of monetary heroin (free money to financiers, zero interest rates, quantitative easing, unlimited liquidity not just to financiers but foreign banks, etc.) to stabilize the patient (the U.S. economy), but now that the patient has been restored to health via the monetary heroin addiction, the heroin can now be slowly tapered and the patient will not experience cold turkey withdrawal symptoms.
Though it is never stated openly, this is a precise replay of Japan's monetary policies, only on a grander scale. The Fed's leadership (Ben Bernanke, Janet Yellen et al.) concluded that the Japanese had failed to revive their dysfunctional economy because the monetary heroin doses they injected weren't large enough.
So the Fed upped the ante and injected unlimited quantities of monetary heroin into the U.S. (and thus the global) financial system.
The problem with this "cure" is that it leaves all the fundamental causes of the economy's dysfunction untouched. This is precisely what Japan has done for 20+ years: put aside the difficult task of structural reform that necessarily disrupts the vested interests profiting handsomely from the bloated, corrupt, crony-capitalist Status Quo and instead did the easy fix of flooding the dysfunctional economy with monetary heroin.
Giving a patient riddled with structural cancer heroin eases the pain but does not cure the disease. Addicting the patient to monetary heroin only makes the problem worse, as now the patient is suffering from both addiction to monetary heroin and a host of structural diseases.
The U.S. has done essentially nothing to address the structural issues that are crippling its economy:
-- Higher education funded by $1.2 trillion in student loans continues to be unaffordable and disconnected from the emerging economy, that is, the parts of the economy that don't need monetary heroin to prosper;
-- Sickcare (a.k.a. healthcare) continues to squander almost 20% of the nation's GDP while performing poorly when compared to other developed-nation healthcare systems;
-- Concentrated wealth continues to set the agenda and pull the strings in Washington D.C. and state/local governments;
-- The foundations of a free and flexible economy such as Net Neutrality continue to erode under the ceaseless assault of wealthy corporate vested interests;
-- Failed programs such as the F-35 Lightning fighter aircraft continue consuming hundreds of billions of tax dollars due to crony-capitalist lobbying and bureaucratic worship of sunk costs;
-- Banking "reforms" did nothing to restructure a fragile, parasitic financial sector--all they did was add costs while maintaining the sources of fragility such as mark to fantasy methods of calculating asset values;
This is only a partial list of the structural problems that are begging for deep, systemic reforms. But since each real reform would step on the toes of powerful vested interests, the "fixes" are cosmetic public-relations ploys or new layers of central-state bureaucracy that add costs but do nothing to change the sources of dysfunction.
The true believers in the self-sustaining recovery naively believe that the only problem was a lack of monetary heroin. They naively assume all the structural illnesses of the U.S. economy will heal themselves once the monetary heroin has generated more subprime auto loans, more shadow banking skimming, more margin debt, more junk bonds, more corporate buy-backs of stocks and more private-equity fund buying of homes-to-rent--all the "good stuff" enabled by monetary heroin.
Those of us in the this is as good as it gets camp recognize all these results of monetary heroin are self-liquidating: the subprime auto loans supporting vehicle sales will default; the shadow banking system will trigger another credit crisis caused by risky overleveraged bets; the private-equity rentier skim that has boosted housing will find renting houses in a recession is a money-losing proposition; margin debt will fund risky purchases of stocks at the top of the cycle; corporate buy-backs will gut the finances of companies that pursued buy-backs as a means of boosting the value of their stock; junk bonds will default and so on down the line.
The reality is that nothing has been done to address the structural rot at the heart of the U.S. economy. Pumping the economy full of monetary heroin hasn't generated a self-sustaining recovery--all it has done, and indeed, all it could ever have done, is enable the exact same risk-laden malinvestments that triggered the global financial meltdown in 2008.
You keep shoving in the same inputs, and you guarantee the same output: another
crash of credit bubbles and all the malinvestments enabled by monetary heroin.
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