09.30.2009 0

The Panic Bloom

  • On: 10/13/2009 09:25:34
  • In: Economy
  • By Bill Wilson

    “The Americans are enjoying the present at the cost of selling off ever larger chunks of their future. Arguably, the imminent economic crisis is the most thoroughly predicted one in recent history. Rather than refuting the crisis, the current US economic boom merely heralds it. Biologists have observed similar phenomena in plants contaminated by toxins. Before they wither, they produce one last batch of healthy shoots—to the point that they can hardly be distinguished from healthy plants. Some speak of a panic bloom.”—Gabor Steingart, America and the Dollar Illusion, October, 2006.

    The U.S. could well be in the midst of a panic bloom. As noted by Gabor Steingart in 2006—brilliantly foretelling of the global economic crisis to come—right before a plant is about to die, it produces “one last batch of healthy shoots.” These, he writes, “can hardly be distinguished from healthy plants.” And so it is with the U.S. economic recovery that, some misguided analysts conclude, is now fully underway. 

    Writes Brian Wesbury in yesterday’s Wall Street Journal, “Since March 9, when investors realized mark-to-market accounting rules would be corrected, the Dow Jones Industrial Average is up 51%, the S&P 500 is up 58% and the Nasdaq is up 69%. The NYSE Financial Stock Index is up 137% and bond market risk spreads have narrowed considerably, suggesting that investors are confident the crisis has ended. By nearly every measure, the economy is tracing out a V-shaped recovery.”

    But is this really a healthy recovery? Or is it simply that “one last batch of healthy shoots” before the final collapse comes? Time will tell—but certain signs are far more ominous than optimistic.

    Gold persists at over $1,000 an ounce, on its way to $1,100, warning of inflation and higher interest rates to come as a direct result of record-setting levels of government spending, borrowing, and printing. Unemployment remains high, with U-6 measured at 17 percent in September. And over 358,000 homes were in the foreclosure process as of August, 2009.

    Most troubling of all is the compounding problem of the U.S. national debt, now at nearly $12 trillion, that promises to be an increasingly heavy drag on the economy. The overall liabilities of the entire nation—private debt + government debt—is an eye-popping $57 trillion. As Steingart writes, “The Americans are enjoying the present at the cost of selling off ever larger chunks of their future.”

    How could this happen? In sum: Follow the easy money.

    Because of few constraints on borrowing in the U.S., both by individuals and by the nation, the quickest means to raise capital these days is to borrow it. For example, outstanding mortgage debt rose from $3.805 trillion in 1990 to $14.568 trillion in 2007—a 383 percent increase. The national debt itself rose from $3.23 trillion to $9 trillion, a 278 percent jump.

    The money supply behaved predictably as a result, rising from $1.787 trillion to $5.268 trillion over the same period, according to the Ludwig Von Mises Institute. And prices followed: gold rose from $386.20 an ounce to $695.39, a 180 percent increase, and oil rose from $23.19 a barrel to $64.20, a 277 percent increase.

    Predictably, the unsustainable debt binge flooded markets with liquidity, resulting in bubble after bubble: tech, housing, oil and commodities, and then treasuries.

    Now once again, hedgers against inflation are warning that another bubble is about to pop. Even the normally dispassionate editorial board of the Wall Street Journal is concerned:

    “For a time in the wake of the panic, the dollar benefitted from a flight to the relative safety of U.S. Treasurys and other dollar assets… In a storm, the dollar was thought to be less risky than other investments. But as this overall global risk aversion has ebbed, the risk calculus has turned and the dollar itself has become more dangerous to hold than nondollar investments.”

    Why is this so? The Federal Reserve has been flooding the entire world with dollars. It has more than doubled the money supply since the crisis began in 2007. It has kept the federal funds rate—the rate at which banks borrow from the Fed—at an historic zero percent rate. This is far beyond normal monetary easing, thought to consist of modest levels of inflation and lower-than-normal interest rates. This is outright monetary devaluation.

    The motive, of course, can only be to emerge from the U.S. debt problem—in the most dangerous and deleterious way possible. In short, the Fed plans on inflating the debt away. And this has left holders of dollars and of U.S. debt the world over on the verge of a panic. The only question left is: Who will be the first to dump their dollars before the devaluation fully ensues?

    When the dollar run begins days, weeks, months, or even years from now—not if, but when—what geopolitical changes will it leave in its wake? As Steingart noted, long before the panic of 2008 ensued, “One morning many dollar-owners will wake up and look at the facts about the US economy without their rose-colored glasses—just as private investors woke up one day and took an unflinching look at the New Economy, only to see companies whose market value couldn’t be justified by even the most dramatic of profit increases.”

    And the question now is: Have we finally reached that dreaded day? In a mad rush to save itself through a panic bloom, has the U.S. economy sprouted one last batch of healthy shoots right before the dollar—and thus the economy—wilts, wobbles and completely keels over? Only time will tell, but as Steingart observes, the outlook isn’t brilliant.

    Bill Wilson is the President of Americans for Limited Government.

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