The Great Deception (2008 - ????)

Why hasn’t the combination of stimulus spending which is really just massive deficit federal government spending; two and a half wars that have no end in sight; very large state and local deficit spending and borrowing programs; huge entitlement programs at both the federal and state level and very low interest rates coupled with quantitative easing programs, not produced a big uptick in economic activity and jobs creation?

The Washington DC leadership – political, bureaucratic, academic and, most of all, economic said that these activities would be the answer to the bursting of the housing bubble and the consequential decline in housing prices; the weakness in the financial system which is a nice way of saying that the large financial houses (banks and investment firms) were holding trillions of dollars of crappy real estate assets on their books at values way in excess of current market and the decline in employment.

These voices today say we need to do more. We saved the day by what we did but now we need to do more. They ignore that they previously said that doing what is described above would provide an answer to the downturn. It would be the correct offset to the unwelcome correction underway. They say more, more, more until the upturn feeds upon itself. Avoid the pain of correction; just spend until it passes.

Are they right today? Were they right before?

TheFundamentals thinks the answer lies in the facts that are available to us. These facts are:

1. The housing bubble collapsed because high housing prices were no longer sustainable. People; buyers; the market could not afford the prices. This housing market can be toyed with by the government. It can actually support a bubble. For a while. How can it do so? Because it can support the elevating prices with low interest rates and easy terms to permit financing of the bubble. Why would it do that? Well, it darn well shouldn’t but with the combination of horrible oversight by Greenspan and Bernanke coupled with politicians gone wild and bureaucrats gone greedy at FNMA, GNMA and FHLMC, it did. It was not sustainable because at some point the market intervenes. Too much supply. Demand waning because prices are too high. It collapses. Quickly, usually, but this time both quickly and ongoing. It is not stabilizing. It continues to decline today. That’s a fact.

2. There are three other huge bubbles in the American economy. They are:

A. Government spending at all levels. Federal, state and local.

B. Health care costs.  (See:  http://ucatlas.ucsc.edu/spend.php )

C. Education costs.  (See:  http://nces.ed.gov/fastfacts/display.asp?id=76 )  and  (See:  http://www.oecd.org/dataoecd/54/12/46643496.pdf )

3. The common thread in these three bubbles is government. There is no market place that ultimately brings balance back to supply, demand and price or cost. Government replaces the market. It sustains the bubble. Even though no one can any longer afford the bubble. The dollar cost of these three areas now exceeds the value received by a substantial margin. Perhaps as much as three to one. Which is a nice way of saying that the spending in each area should be cut by as much as 2/3rds or 67% in order to bring the cost in line with value received.

4. America cannot afford the bubbles in government spending at all three levels. America cannot afford the bubble in health care costs. America cannot afford the bubble in education costs. We pay way too much for what we get; for the value of the goods and services received.

5. The bubbles are now the foundation of the American economy. Today if you count the people who work for government at all levels including education and you include the people who work in health care and the people who are either out of work or underemployed, and you couple those folk with those who are not in the workforce because they are either too young or too old, you end up with about one privately employed person supporting him/herself and two other non employed or government bubble employed people.

6. Those are facts. America’s economy is not working because Americans are not working in private commerce jobs.

7. The global demand for goods and services; the gross world product; the output of all the nations of the world has never been higher. Never. The world is working and producing and consuming and growing. At record high levels.  (See:  http://data.worldbank.org/indicator/NY.GDP.MKTP.CD )

8. And yet America is not working. Underemployed. Or just unemployed. Or government bubble employed.

9. And the government supports this condition by supporting its bubbles. It thinks the Promised Land is just around the corner. Another six months or twelve months and the pump will be primed and all will be well again. Keep spending; just raise taxes and all will be well. The great deception.

10. Not a chance until the three bubbles deflate. That will not happen until government stops spending, borrowing and printing dollars to support the bubbles. When will that happen? Apparently never unless we go broke. That is the great deception. We call it bubble economics.

Closing. We happened upon the blog of a young woman who posted a series of photographs of her life at http://thefundamentals.tumblr.com/  One of her photos was the blurred image of a bicyclist on which was imposed the following words, “the summer was full of mistakes we wouldn’t learn from”.   Pretty good philosophy for a young woman experiencing her life? Perhaps. But we reread our words above and conclude that the last 3+ years of American economic leadership are full of mistakes we haven’t learned from. We are living the great deception. We are not learning from our mistakes.  Perhaps acceptable for young folk; most certainly not for a nations leadership.