I'll Take Tamny's Take On Our Economic Mess Any Day

WHD: OBAMA'S TOP TEN EXCUSES FOR THE FAILING ECONOMY

WHEN NO CORPORATION OR COUNTRY IS ALLOWED TO FAIL, THE ENTIRE SYSTEM ULTIMATELY COLLAPSES

WHILE ONE (IT TURNS OUT KEYSIAN) STOCK SERVICE I subscribe to couldn't wait yesterday to blame Reagan and Bush's deficit spending for the current mess we're in---and no, I would never renew my subscription now that I know its true colors-- and a silly John Kerry blames the Tea Party, I find John Tamny's explanation the most sane, sensible, balanced and non-partisan of all.

As markets roil from years of government meddling---on both sides of the Atlantic and both sides of the political aisle---it's a sound analysis that you won't find in the NY Times or other MSM outlets that says again government meddling is the problem, not the cure. When oh when will we ever learn? Here's an excerpt from today's full piece at Forbes online:

World markets cascaded downward last week, and the usual culprit was government error. Much as compound interest compounds, so do governmental mistakes and their impact on the global economy.

Despite this simple truth, a business media that’s never understood what it reports on continues to buy into the absurd suggestion that government action will cure what ails us. As a front page Wall Street Journal report from Friday not-so-shockingly observed, “markets spiraled downward” under “the strain of the global economic slowdown and the failure of policy makers to stabilize financial markets.” Lost on the business media is that the slowdown and weak markets are explicitly a function of governments trying to stabilize markets rather than let unfettered price signals reprioritize capital allocations so that real recovery can take shape.

First up here is Italy, and the debt problems of its government. Supposedly the country’s struggles are weighing on the markets, and while that’s true, it’s true in the way Lehman’s bankruptcy brought pain to markets solely due to a mistaken bailout of Bear Stearns months before.

Back in the spring of 2008 the wrongheaded bailout of Bear created a presumption among financial institutions that they were all “too big to fail” such that they needn’t clean up their increasingly toxic balance sheets, and worse, it led to an expectation among the CEOs of all healthy banks that they would be the recipients of “Jamie” deals were they to save institutions hurtling toward bankruptcy. This describes what’s happening in Italy very neatly.

Thanks to a very wrongheaded initial bailout of Greece months ago, the signal to other listing governments was that a Greek bailout meant that every government would enjoy similar treatment. So rather than slash spending right away to avoid default, non-Greek governments continued their profligate ways on the assumption that they’d get a “Greek” deal.

In that sense we should view Greece as Bear Stearns, and Italy as Lehman Brothers for Italy not fixing its problems right away just as Lehman failed to. But much as Lehman became a crisis owing to uncertainty about how its collapse would be handled, so does an Italy that delayed necessary austerity weigh on markets today due to vast exposure to its debt.

Alfred Jay Nock long ago made plain that when you mess with market forces you get much worse in the end, and that describes the Italian situation quite well. Not allowing free markets to discipline Greece on the way to default gave us Italy, and failure to let Italy be disciplined simply ensures much greater threats down the road. Contagion? Yes, but only in the sense that bailouts are contagious for perpetuating that which ails us.

Considering global currencies, with the dollar and euro growing weaker by the day, monetary authorities in Japan and Switzerland labor under the false impression that following the world’s two leading currencies down this most impoverishing of roads is the way to prosperity. Missed here is that the yen and franc are only strong insofar as the dollar and euro are incredibly weak. Looked at in gold terms, there’s a global run on paper currencies of all shapes and sizes taking place that promises to make a bad situation worse.

To put it simply, when investors commit capital through the purchase of stock and bonds, they’re buying future income streams. But with policy around the world in favor of currency devaluation, investors increasingly see the investment in stocks and bonds that allows companies to expand and create jobs is a fool’s errand. Why invest if any returns will be eviscerated by devaluation? Devaluation very clearly means less investment, and with reduced investment less company formation and job creation.

Looking to the hapless U.S., though Establishment media figures early last week lauded or vilified the budget deal for being either the path to small government or the road to hell, wise minds saw it for what it was: a complete joke. Indeed, it only took a few hours for budget experts to find out that far from austere, the deal hands a wasteful government more increasingly worthless dollars to destroy on government programs; the spending cuts a distant object that future Congresses will doubtless ignore.

Some on the right, including this writer, have suggested that the deal is an embarrassment to the Republicans who claim to love small government, and as such the deal ensures an Obama victory in 2012 for an angry Republican base sitting out the looming election. That alone is enough to scare the markets, but really, assuming Tea Partiers are so dim as to offer the GOP their votes ever again, can anyone honestly say the Republicans would do better once in power? Markets surely priced in the greater likelihood something last week, either an Obama victory or the GOP retaking the White House and maybe the Senate, but with both sides utterly clueless as to how economies grow (lest we forget, all this carnage began under Republicans), it’s possible investors sold down the political implications of the budget deal out of disgust for both parties.

One thing’s for certain, however, and that’s that the size and burden of our government will continue to grow. This is hugely problematic because as my H.C. Wainwright colleague David Ranson puts it, the private sector that is most often disciplined by the exacting nature of markets in its allocation of capital is always in competition with the always wasteful federal government when it comes to access to credit.

And with our political class having exhibited zero willingness to enforce real cuts in spending, a government that by definition consumes and destroys capital is set to do a lot more damage. It can’t be stressed enough that there are no entrepreneurs without capital, but with politicians in both parties having revealed yet again a sneering contempt for real spending cuts, the growth capital necessary for economic expansion will continue to dwindle in amount.

In the near term, the markets knew full well what an aloof commentariat failed to understand about the budget deal, and with the latter ensuring more nosebleed spending in return for spending cuts that will never materialize, the dollar continues to fall; it’s collapse aided by the hapless weak dollar advocate Tim Geithner remaining in place at Treasury. And with the weak dollar the single best way to wreck an economy for it driving limited capital into the tangible safe havens of yesterday, the economic weakness we’re now suffering promises to get worse.

Quite scarily, the slower growth that the falling dollar tautologically foretells promises a pile-on effect, or more clearly, renewed Federal Reserve activity of the quantitative easing variety. That the Fed could not engineer yet another dose of easing that will weaken the economy further without the consent of the White House and Treasury means that the dollar will continue to fall, with more and more investors going on strike in order to avoid more destruction of the capital they might have otherwise committed to growth initiatives.

Sadly, it only gets worse from there. Indeed, a Fed that has redefined deflation (its true definition is the substantial rise in the value of money, something we’ve not seen since the late ‘90s) to mean falling asset and consumer prices, will intervene to prop up that which shouldn’t be. To state the obvious, capital assets and consumer goods prices rise and fall all the time, and their fluctuations are essential for telling the markets what economic concepts should receive capital in abundance, and which ones should be starved of it.

But afraid of a deflation that is quite simply not deflation, the Fed will use all of its powers to prop up the housing and mortgage assets that necessarily need to fall in order for a recovery to take shape. Put simply, it’s essential that the value of failed ideas plummet so that capital can be reoriented to the concepts that will actually create wealth. The Fed is supporting what the markets, if left alone, would allow to die, and the economic result of its interventions is pretty horrifying.

All of which brings back to the even more horrifying notion that the state should intervene in order to protect or bail out that which the markets have left for dead. This is certainly what the global economy has suffered these last few years, and it goes far in explaining the increasingly shaky nature of the economy.

For one, there is no state. Governments have no resources, so for those same governments to prop up the losers, they must by definition shackle the winners. All of this with our money.

After that, for governments to use that which they’ve taken from us to “stabilize” the markets is once again for those same governments to author our continued economic decline; one that the stock markets last week revealed in living color. That’s the case because governments can only “stabilize” the failed ideas which, if left alone, would be properly starved of capital so that better ones could receive it. More to the point, governments can only prop up and stabilize the failed ideas of the past that the markets are looking to rid us of; all this with capital taken from individuals and businesses that are succeeding.

Adam Smith once warned against stationary economies; stationary economies serving as capital repellents for the inability of the individuals who comprise them to progress. In today’s case, we have much worse. Indeed, far from stationary, our economies are moving backwards on our dime through the subsidization of that which is failing despite failure always and everywhere serving as the father of progress. If failure didn’t exist, we’d have to invent it, but governments have sought over the last four years to buy off or regulate away its existence with predictably negative results.

So with failure a dirty word to the politicians around the world whose machinations against it hold the economy down, the global economy is presently in reverse. And with it in reverse, investors are rendering their harsh judgment.