John Hussman wrote a nice piece in “Extraordinarily Large Band-Aids” after last Friday’s disappointing jobs report. Here are some highlights:
I’ll reiterate that from our perspective, the essential difficulty of the market here is not Greece, it is not the Euro, it is not Hungary, and it is really not even the slow pace of job growth in the latest report. The fundamental problem is that we have not, as a global economy, accepted the word “restructuring” into our dialogue.
Instead, we have allowed our policy makers to borrow and print extraordinarily large band-aids to temporarily cover an open wound that will not heal until we close the gap. That gap is the difference between the face value of debt securities and the actual cash flows available to service them. The way to close the gap is to restructure the debt. This will require those who made the bad loans to accept the associated losses. By failing to do that, we have failed to address the essential problem faced by the world, which is that we have created more debt than we are able to service.
A few observations. First, I remain convinced that the other shoe to drop is not Greece or Spain or Hungary, but rather a second wave of major credit strains here in the U.S. related to fresh delinquencies from exotic adjustable rate mortgages.
Second, it is a delusion to interpret economic statistics suggesting an economic turnaround over the past year without factoring out the extent to which that has been driven by unsustainable levels of deficit spending.
If you do that, you’ll find that the economy has recovered to the point where the the year-over-year growth rate since early 2009 now matches the worst performance of any of 50 years preceding the recent downturn.
Third, when our policy makers insist on defending reckless lenders with public resources, we have to recognize that this is not free money. When the government issues a paper liability for real value, that real value gets directed to the recipient at the expense of countless other activities. Even seemingly costless interventions can be redistributions of wealth. For example, the strategy of dropping short-term interest rates to nearly zero as a way of increasing the interest spread earned by banks has the direct effect of impoverishing savers, very often elderly people who rely on lower risk investments for capital preservation.
With regard to Fannie Mae and Freddie Mac, either the Treasury securities issued in order to cover their losses will crowd out other private investment, or the eventual inflationary effects of printing money to do so will act as an implicit tax on people with fixed incomes. As a side note, we don’t hold any Fannie or Freddie liabilities in the Strategic Total Return Fund. I am still unconvinced that the Treasury’s unlimited 3-year backstop was authorized or even contemplated by the 2008 HERA legislation, which is what the Treasury used as justification.
A dollar spent by the government is always a dollar taken from somebody and diverted from some other activity. The only question is whether the dollar spent is more productive, or satisfies a more desperate human need, than the alternative activity would. If not, the spending is hostile to economic growth and public welfare. There is no free lunch. At best, what people call “stimulus” can only occur if the dollars spent by government are more productive than they would have been if they were allocated privately. I cannot imagine how allocating public funds to the same reckless stewards of capital that made the bad loans in the first place can possibly be a productive use of capital.
All of this would be fairly moot if it we were simply talking about 2008 and 2009. However, my impression is that as the effects of last year’s surge of deficit spending taper off, we will begin to observe a more accurate and generally flat reflection of underlying economic activity. I have been commenting on the same topic for the last year from time to time, although in a less eloquent way than John Hussman did. What has been called an economic recovery has been based entirely on stimulus, which makes it impossible to determine or measure if there had been any real recovery without it. Time will tell, as current rebates and tax credits come to an end, if there are some real green shoots in this recovery or not. Of course, to not face reality and kick the can down the road even further, government in its infinite wisdom could always introduce a new and improved Stimulus 2.0 version. Let’s hope not, because this would accomplish nothing but plunge us deeper into the debt spiral leaving us all to chant “Hello Greece, here we come…”
[My Emphasis]
