That we live in an age of miracles has become common knowledge. A man can sit on a beach near Sydney and carry on a casual conversation with an eskimo. Using an internet-based phone service, he may do so at little cost. If this were not miracle enough, he may now grow a new nose, if he needs one, on his own arm.
In this age, people seem ready to believe anything is possible – apparently, even reviving the dead. After the fever of the Late Bubble Epoque, the world economy finally succumbed in 2007. By December that year, the US economy was shrinking.
The feds now propose to return to the glory years of the pre-crash era. Most economists polled by The Wall Street Journal believe it can happen. The economy is already recovering, they say, thanks to government intervention. But we are suspicious. Both of the miracle and the miracle worker. What is government really up to? Few people take the time to think about it. Yet the question leads to a hypothesis: the feds aren’t as blockheaded as they appear.
In its naked form, government is not evil; it is merely a self-interested parasite. Its main value – to the extent it has one – is in its ability to fend off other parasites. The citizen, generally, would rather be governed by someone speaking his own language. Someone he elected. Or at least someone whom local connivance put in place. He does not usually resent the homegrown parasite – though it routinely costs him a large part of his output. On the contrary, he grows so fond of it he even dons his helmet from time to time to protect it – to keep other parasites at bay.
Beyond that, the role of government is to keep order, protect campaign contributors and lure supporters with other peoples’ money – doling out a concession to one, locking up another, and giving a subsidy or a protective tariff to a third.
In the US, entire industries now operate as wards of the state. They may have too little capital. Or their operations may be too costly. Or their products may simply be out-of-date and unattractive. Still, government keeps them alive – at the expense of rivals. The spectacle is magnificent and sordid at the same time – like a great, stately oak teeming with pests, lobbyists and mossy hangers on. Many of the branches are decayed and rotten. But what politician would cut off a dead limb with so many voters on it?
That preface on the State out of the way, we turn to the state of the economy. The consumer credit expansion of the 1945-2007 period ended with a bang. While there were many actors involved in the show, with many supporting roles and plot twists, the key to understanding the final phase was to capture the symbiotic relationship between China and the US.
It seemed to serve both parties well. Each enabled the other’s excess. China added mightily to the world’s supply – far more than was needed. America did heroic work on the demand side. US growth was led by consumer spending; in China, by capital investment. Factories grew. Output was revved up. But there was a flaw. Americans ran out of money. After the 1970s, they could only increase their buying by going into debt. This they did with insouciance bordering on insanity. Total debt rose to 370% of GDP and blew up in 2007, with major lenders forced into bankruptcy or mergers, while GDP walked backwards at its fastest pace since the end of World War II.
Now the old formula no longer works – neither for Americans nor the Chinese. Despite the urging of their government, Americans cannot be expected to take on more debt so as to keep consuming stuff from China. As savings rates rise toward 10%, US demand alone will fall by an estimated $1trn a year. With the China trade now accounting for 83% of America’s non-oil trade deficit, you’d think the Chinese would get out the chainsaws. They may already have as much as twice the output capacity needed to meet real demand. They should be trimming as much as half their manufacturing sector, not expanding it.
We draw out that relationship only to show how hopeless it would be to draw it out further. It is obvious that Americans have enjoyed too much credit, which led to excess consumption. Borrowing to consume is just another way of saying that consumption was taken from the future and dragged forward. This inevitably leads to a time when the future arrives and demands its pound of flesh. The future arrived in 2007. Thenceforth, the spending that would have occurred ‘in the future’ had already occurred in the past. As a result, the factories that would have produced the consumer items for 2009 found they had already produced more than enough in 2006 and 2007. As a result, the whole thing exploded in a fiery ball of asset-price destruction.
It would be better to invite the future in, let her collect her debts, and get on with things. Yet government officials on both sides of the Pacific continue their numbskull efforts to revive the bubble economy. In the US, the feds are trying to stimulate demand for more stuff. Chinese stimulation is going into producing more stuff. As if the world didn’t have too much stuff already. But the role of government is neither prosperity nor plausibility, but protection of parasites. They’ll keep propping them up and paying them off until the whole thing falls in a heap.
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