David Rosenberg hit the nail on the head this AM. What we’ve got here, he opined, is a Potemkin Economy—a simulacrum of growth extracted from Uncle Sam’s future debt serfs and a booming explosion of paper wealth emanating from the Fed’s printing presses:
Let’s reiterate how much air there is in the economy and the financial markets. Absent these recurring rounds of short-term fiscal stimulus, the level of real GDP would be 6% lower than it is today and deflation, not inflation, would be running rampant. Absent all the Fed’s interventions, the S&P 500 would be at least 20% lower than it is right now,and high yield spreads would be wider by 250 basis points. This is a Potemkin economy. And it is a Potemkin financial market.The fiscal cliff is already arriving and is reflected in the data earlier than even I had been anticipating.
Alas, David is a sober Keynesian who actually recognizes that the US economy has a supply side and that demand “stimulus uber alles” is no recipe for sustainable prosperity. So he treats the current Washington and Wall Street narrative about an impending inflationary boom with the contempt it deserves.
Our only dissent, therefore, is that Rosenberg is too kind. Too modeled, measured and reformist.
Notwithstanding his trenchant analysis, he nevertheless suggests that if Washington had not overdone it–jumped the shark on monetary and fiscal stimulus, so to speak—we wouldn’t been in for the impending season of trouble.
And while that position is plausible, we think that the real issue is more than just soberly setting the stimulus policy dials. In truth, today’s congenital “stimulus” disease threatens to be fatal because Keynesian-style stimulus is inherently destructive of capitalist prosperity.
Unfortunately, that truth was lost on Washington and Wall Street alike years and years ago. Consequently, the seminal developments which changed everything are either unknown to today’s operators or are treated as stale history, like Don Larsen’s perfect game (no hits, no walks) in the 1956 World Series.
Yes, we should have kept Don Larsen’s rookie card when we had it back in the day, but that unfortunate dereliction doesn’t gainsay the point. To wit, you don’t need to know anything about Game Five of the 1956 series, but you absolutely must reckon with:
- Tricky Dick Nixon’s pulling the pin on sound money at Camp David in August 1971;
- Ronald Reagan’s unintentional but dispositive obliteration of the GOP taboo against elective, sustained deficit finance;
- Alan Greenspan’s transformation of the Fed from an inflation-fighting central bank with a limited remit into an all-powerful monetary central planning scheme empowered to manipulate and falsify any financial asset price that might allegedly contribute to an improved state of macroeconomic performance and enhanced societal prosperity and wealth;
- Donald Trump’s final defenestration of the GOP as the agent of fiscal rectitude and monetary policy sobriety in America’s two-party duopoly of governance
These developments had profound implications. They don’t lend themselves to policy recalibrations or dialing back the excesses or cooling the exuberance.
Instead, they are evocative of a condition in which the State is pervasively and toxically at war with the Economy. That is to say, market capitalism is resilient and hardy, but when state intervention becomes plenary, permanent, heavy-handed and peremptory, the vital processes of capitalist prosperity can become deeply impaired, if not destroyed.
For instance, the sine qua non of genuine capitalist prosperity is capital formation. The latter concept encompasses both the requirement to replace capital consumed in production each year, as in the accounting metrics for depreciation and amortization; and also new investment in the sense of growth in the absolute level of the capital stock.
Within the NIPA (national income and product accounts) scheme of economic measurement, the closest series to the idea of capital formation is that for “real net private domestic investment”.
Alas, after two decades of relentless money-pumping by the Fed and borrow and spend on the fiscal side, here is what Washington has to show for it. Namely, $848 billion of constant dollar investment in the the year 2019, which was held to be the Greatest Economy Ever by the Donald and Wall Street alike, which figure happened to be 9.1% smaller that it had been in the year 2000.
Real Net Private Investment, 2000-2019
Back in the day (say the 1970s) old fashioned non-Keynesian economists used to talk about tools per worker as the lynch pin to rising living standards and sustainable wealth creation. The common sense meaning was that worker hours and sweat alone were not sufficient conditions for meaningful economic growth, but that the crucial additive factor of productivity gains depended upon a robust rate of capital formation.