Economists Do Not Live in a Darwinian World

I continue to be surprised by the market’s confidence in economic growth based on borrowed money.

It did not work in Europe in the 1970’s.

Nor did it work in Japan for the past twenty years.

Both of these economic powers have now sub-par economic growth and a stubbornly huge financial burden.

Actually, the Japanese public debt will reach a quadrillion yens next summer.

I looked it up, quadrillions is what comes after trillions.

Trillions are already so last decade.

Debt and money printing has not worked well in the US either.

Consider that from 2006 to 2010, the US monetary base expanded by 134%.

Total public debt has grown 60%.

And how much GDP growth did that buy us in those 4 years?

A paltry 7.6%.

Some fiscal restraint will have to come at a certain point.

With the changing political winds, it could come a bit sooner than later.

In this, the UK is showing us the way.

The country is dealing with problems Americans can relate to:

High debt, double digit deficits and an accommodating central bank.

And now stagflation induced by the announcement of the inevitable austerity program.

Already GDP growth was negative in Q4 and inflation reached 3.7%.

But Great Britain is not alone.

Inflation has now emerged in most emerging markets.

It is forcing countries like Brazil, China, Indonesia or India to seriously tighten their monetary policies.

This will slow down global growth.

Can we really solve today’s economic woes without pain?

Can we grow out of the financial crisis merely by printing money?

Have economists fooled us into a global debt trap?

If we lived in a Darwinian world, economists would already be extinct says the economist David McWilliams.

Indeed, economics looks at times more like a religion than a science.

Beliefs prevail over facts.

Here is a case in point:

Prominent economists still talk about the unbearable cost of the “Bush tax cuts”.

Now, one can have a legitimate debate about the moral or political implications of these cuts.

One may be shocked by the low taxes on bonuses paid with taxpayers’ money to some lucky bankers.

However one cannot debate the fact that the Bush tax cuts have substantially increased government’s revenues.

The “cost” was a 35% increase in revenues from 2003 to 2006.

That is much more than GDP’s growth over that period.

Receipts as a share of GDP went from 16.5% to 18.4%, not exactly a burden to the Treasury.

Federal revenues are difficult to debate.

But what about the unemployment rate which is twice the official number?

The more people get discouraged, the better the unemployment rate.

What about CPI?

What about GDP numbers if the CPI deflator is wrong?

Inflation is now rampant around the world.

But not in the US.

The CPI is not budging.

Are we so different or is the CPI underestimating the inflation?

It is for economists to debate this, but some skepticism from investors should apply.

The CPI’s largest component, owners’ equivalent rent (OER), accounts for 42%.

I don’t know how this OER is calculated, but it sure will keep the index down while the real estate bubble deflates.

This component of the index will justify QE3.

But why did the CPI not go up during the housing bubble??

Greenspan and co kept interest rates artificially low based on the lack of inflation then too.

Medical care prices account for only 6.5% of the index and we are told these costs were up only 3.3% last year…

Food and energy are small components too.

But if they have too big an impact, we are told to ignore them.

Now, low CPI has many advantages.

It allows the government to overprice its debt instruments.

It allows for more money printing. (Since it is not creating any inflation)

It also transforms nominal GDP growth into real growth.

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