Central bankers on both sides of the Atlantic are meeting this week. So-called "investors" (aka. gamblers) are waiting with bated breadth, wondering whether these titans of global finance will do something, or do nothing. If they do something, they will print money, for it is the only thing they can do. (Interest rates can not go lower.)
If these wise stewards of our economic fortunes print money, prices in certain assets classes will rise, which enables further gambling on investment in the economy. If they do nothing, there will be great wailing, beating of breasts and gnashing of teeth. Investors will have no choice but to wallow in this giant pile of manure called the global economy.
In his latest newsletter, John Hussman begins with a priceless guide for the perplexed.
The enthusiasm of investors about central-bank interventions has reached a pitch that is already well-reflected in market prices, and a level of confidence that with little doubt, investors will ultimately regret.
In the face of this enthusiasm, one almost wonders why nations across the world and throughout recorded history have ever had to deal with economic recessions or fluctuations in the financial markets. The current, widely-embraced message is that there is no such thing as an economic problem, and no such thing as risk.
Bernanke, Draghi and other central bankers have finally figured it out, and now, as a result, economic recessions and market downturns never have to happen again. They just won’t allow it, printing more money will solve everything, and that’s all that any of us need to understand. And if it doesn’t solve everything, they can just keep doing more until it works, because there is no consequence to doing so, and all historical evidence to the contrary can finally, thankfully, be ignored.
How could anyone ever have believed, at any point in history, that economics was any more complicated than that?
How could the rest of us have been so naive as to believe that economic downturns and collapses are inevitable, as history demonstrates, when all of these tragic events could have been prevented if only those issuing the currency had simply printed more of it?
Hussman is skeptical about this reborn human enthusiasm for solving economic problems by printing more money.
Unfortunately, the full force of economic history suggests a different narrative. Up to a certain point, which seems to be about 100-120% debt-to-GDP, countries can pull themselves from the brink of sovereign crisis through a combination of austerity (spending reductions), restructuring (putting insolvent financial institutions into receivership and altering the terms of unworkable private and public debt), and monetization (relief of government debt through the permanent creation of currency).
Austerity generally reduces economic growth (and corporate profits) in a way that delivers less debt reduction benefit than expected, restructuring is often stimulative to growth because good new capital no longer has to subsidize old misallocations, but is politically contentious, and monetization of bad debt produces clear but often quite delayed inflationary pressures. None of these choices is simple.
The word "contentious" in this context is a euphemism for impossible.
Moreover, once countries have created massive deficits and debt burdens beyond about 120% of GDP – typically not to accumulate productive assets and investments that service that debt, but instead to fund consumption, bail out insolvency, and compensate labor without output – austerity produces further economic depression, restructuring becomes disorderly and produces further economic depression, and attempts at monetization tend to be hyperinflationary.
Europe is fast approaching the point at which every solution will be disruptive, and remains urgently in need of debt restructuring, particularly across its banking system...
Let us note in passing that "restructuring" as Hussman defines it is impossible because of the well-entrenched political power of the big banks both in Europe and here in the United States.
And now I want to talk about Keynesian economists and liberals. If you lift up a rock resting amongst the sprawling clutter in the liberal mind, you will find a Keynesian economist lurking beneath it. Ben Bernanke is a liberal, though he would not readily acknowledge that description. That is why fiscal conservatives hate him so much.
We all know some liberals. Some of us used to be liberals. They are such nice people! They care, they really do. They are compassionate people, unlike those conservative pricks.
Liberals (or "progressives") everywhere believe in the infinite power of money printing. If you ask the Conscience of a Liberal, also known as Paul Krugman, what we should do to End This Depression Now, he will talk about endless fiscal stimulus and money printing. He is very enthusiastic about Central Bank purchases of Federal debt. He wishes the Federal Reserve would do more of it. He does not simply say we need some inflation; he embraces it. All economic problems can be solved in this way.
But we need not pick on just Krugman. He is a convenient example because is he archetypal. He invites a response. People like Brad DeLong, James Galbraith, and Dean Baker, who are not so well known by the public, will tell you the same things.
And now we return to Hussman. I will reprint this text with emphasis for your convenience.
Bernanke, Draghi and other central bankers have finally figured it out, and now, as a result, economic recessions and market downturns never have to happen again.
They just won’t allow it, printing more money will solve everything, and that’s all that any of us need to understand. And if it doesn’t solve everything, they can just keep doing more until it works, because there is no consequence to doing so, and all historical evidence to the contrary can finally, thankfully, be ignored.
And finally, for our nice, caring, compassionate liberal friends, we reconsider Hussman's question.
How could anyone ever have believed, at any point in history, that economics was any more complicated than that?
How indeed.
According to our nurturing liberal friends, we have already reached the Age of Enlightenment. Keynes is Jesus. Economies can always be managed by printing (or borrowing) more money and passing it out like Halloween candy. Catastrophes need never happen again. The best would be yet to come if only the recalcitrance of people like Hussman could be overcome. It sounds like a dream come true to those of us for whom money is scarce.
Lunch is Free. Why doesn't Hussman realize that? What's wrong with him?
It's such a shame. The Rapture has arrived, our Salvation is here, but only our saved liberal friends know it. The rest of us have been Left Behind.