HJL –
I have been a student of economics my entire life. From my early college education in the ’70s and ’80s to continued research for hobby, and for work I have tried to understand the micro and macro perspectives of the U.S. economy.
We are at a place in history that is without precedent. Never has a nation with the responsibility of the reserve currency of the world made such dangerous bets with its economy and currency.
The decisions of the Treasury and FED to head off an electronic bank run in 2008 prevented what would have been the most catastrophic and rapid financial collapse in history. They leveraged everything to right the ship, and it worked. The hope was that it might stimulate demand. Quite the opposite has occurred. We have trillions of dollars sitting on bank and corporate balance sheets, and the debt that should have been wiped out remains. It’s all dead money. The M1 money multiplier is at an all time low of 0.7– unheard of before 2008. It is a death sign. Likewise, M2 money velocity fares are no better at a modest 1.6 or so. The government conveniently stopped reporting M3, but others create this data privately. Labor force participation tells the true tale of woe, not unemployment. Asset appreciation is false because of the stimulus of trillions of dollars that may never end. Gold prices are manipulated and HFT is the norm. The real cost of living rises, while real standards of living fall.
While we might follow the path of Japan with a 20+ year stagnation, and that seems to be our course, history hates a vacuum; it hates stagnation even more. Something ultimately breaks the logjam– war, collapse, or disease. All break the paradigm of a failure to change in unexpected ways.
We should all expect great change while understanding the speed and timing are beyond our ability to accurately predict. It reminds me about the saying of going bankrupt. It starts slowly, then it goes really fast. I am amazed the dollar is still accepted in world trade, yet expect it to change in only days when it fails. This generation has no historic precedent to use as basis for prediction. Only by studying history can we possibly understand what lies ahead. The fourth turning must certainly be ours.
Regards. – S.L.
Hugh Replies: I agree with most of what you have said, but I’m not sure if the decisions made in 2008 actually worked or not. In my current thinking, I’m pretty sure they just kicked the can further down the road and ensured that when (not if) the adjustment happens, it will be far more catastrophic. As far as economics go, I’m not even sure history helps us at this point. Never before has every major economy been based upon fiat currencies and debt so high compared to GDP. I am certain it will self correct, but what form that takes is a mystery to me right now.