Friday, April 3, 2015

Our national obsession with staving off reality.

Charles Hugh Smith has an interesting piece today[1] on the huge mistake we are making by permitting (or relying on) our central bank to masterfully maintain our comfy, delusional (but atrophying) status quo economy by manipulating interest rates and debt purchases.

The economy is way too complex to be amenable to manipulation by fallible humans and, says Smith, more to the point, the Fed is interfering with the operation of natural – and healthy – corrections in any economy. At some point inefficiencies and bad managerial and investment choices (think Solyndra) have to be penalized and serve as object lessons.

Smith makes the analogy to forest mismanagement where fires are prevented from consuming small amounts of dead combustible material per unmanaged, chaotic, natural – and ultimately beneficial – processes. This suppression of natural correction leads to needlessly destructive more massive conflagrations.

Smith also discusses how the stock market is acting like a dangerously high blood pressure reading of a patient who refuses to address his unhealthy life choices. The Fed's use of "quantitative easing" and a zero interest rate policy (ZIRP) are equivalent to a doctor's use of powerful drugs that target only the symptom of the patient's bad choices, namely, the high blood pressure reading.

This is wrongheaded if you are besotted with the progressive idea that humans can master complex systems.

But . . . if you believe that advanced degrees don't confer anything but a surface understanding of reality, and that that "through a glass darkly" deal is a good summary of human efforts to advance in the general direction of what might loosely be called wisdom, you have to fear the inevitable return of Reality. It has an annoying habit of seeping through window cracks and locked (mental) doors. More accurately, it has an annoying habit of crashing through the living room window like an 18-wheeler with no brakes.

We should all feel a deep, gnawing dread about what we are witnessing at the Fed – and throughout society – to forestall or delay healthy correction.

Mr. Wile E. Coyote always woke up at some point but it was never when he was in a good place.

[1] "The Inevitable Failure of Mechanistic Monetary Policy." By Charles Hugh Smith, Of Two Minds, 4/3/15.


Anonymous said...

Unfortunately the correction is WAY overdue. Things have been inappropriately propped up for far too long, and the necessary correction will be so damaging that the powers-that-be are loathe to unleash it. Of course, it's a better option than the freefall that will result from the bubble popping uncontrollably, but at least they have plausible deniability on their side. They TRIED to help, and things were just too far gone. Get out of banks, get out of cash, stock your pantry and board up your doors and windows. Literally. It's going to be ugly.

Col. B. Bunny said...

Two "simple" measures could be proposed. One, freeze spending this year at last year's level. Decrease spending 5% every following year till spending = revenue. Two, every person receiving government money (wages, SS, Medicaid, food stamps, welfare) takes a 25% cut spread out over 10 years. No doubt illogical, unrealistic, short-sighted, unsophisticated, and whatever, but it is at least SOMEthing. Compare and contrast with Ryan's effort to craft a solution which had added layers of complexity and sophistication which was, incidentally, dead on arrival.

However, the operative plan that the brilliant, experienced, and Ivy League-educated savants, seers, mavens, boffins and cognoscenti have devised -- the one locked in concrete and pursued this very moment with vigor, intelligence, imagination, and dash -- is a systemic crash with cries of sauve qui peut all round and the one percenters riding it out on their yachts five miles off shore (or equivalent). (My proposal is naive and even reckless on its face, bear in mind.)

The Operative Plan will not change a bit, as we all know. Even if I were to decrease the targets to a 2% decrease every year and a 10% decrease in government cash over 25 years, such a minimalist -- but firm -- option simply won't be tried. The madness of accelerating, uncontrolled spending fueled by debt WILL continue like it's boom times and Detroit is still the mightiest of capitalist engines.

The cry of "tax the deposits" is in the air with capital controls and soon-to-be-tried variants of the forthcoming Greek desperation campaign to root out nickels and dimes from hoards compiled by decades of tax evasion, and, not doubt, to rent or sell the Acropolis to the Chinese. Or is it the Pyramids? You know what they say about everything east of Calais.

A long way of saying that it's as you counsel. There is no system any longer and the long, awful experiment with socialist utopian fantasies is about to collide with the implacable laws of arithmetic. Musical chairs is a game normally played by subtracting only one chair at a time. This time all players can probably expect an initial subtraction of about half of the chairs. All at once. Clear them fields of fire, boys.

50 years ago none of us contemplated that our country would be awash in foreigners, be a feckless, constitution-optional goulash, have a gutted manufacturing base, be every Muslim's dearest and best pal, and be a relentless, Marxist foe of liberty and capitalism.

But here we are. As Herb Stein observed, "If something cannot go on forever, it will stop."