Op-Ed: Green Shoots or Root Rot?

The American people are being told by Ben Bernanke, Barack Obama, and Tim Geithner the economy is starting to see green shoots. In truth however, green shoots are trying to grow, but a disease keeps causing the roots to turn black and die.

After the malinvestments of the past eight years a recession was inevitable. The mistakes had to be corrected and the market in its natural order attempted to begin the process. The economy slipped into a recession and banks and businesses were forced to liquidate their bad assets. However, the government would have none of this and decided to step in and “fix’ things. First, they bailed out the major banks at the cost of 700 billion advertised as a plan to buy the bad assets from banks. Then it was the stimulus package proclaimed to create three million jobs and spur the economy back to normalcy. As if the last eight years represented normal times. Here is a graph of the projected unemployment rates with and without the stimulus package-

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Unemployment

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The White House estimated the highest unemployment would reach with a stimulus package was near 8%. New unemployment numbers were released in the past week and they showed 263,000 new jobs were lost and the unemployment rate rose to 9.8%. The White House proven wrong again, has since taken to heralding the declining rate of job losses as proof the economy is recovering. Peter Schiff explains this logical fallacy,

“For those market boosters who are prattling on about the possibility of a "jobless recovery," I offer an invitation to join me for a breakfast of "fat-free bacon," "eggless omelets," and "no-carb bread."

The recent decline in the rate of job losses is more attributable to the unsustainability of losing +700,000 jobs per month. At that rate unemployment would have been in the teens by this time instead of 9.8% today. The stimulus did accomplish one thing however, it added around one trillion dollars the annual deficit. But, have no fear Joe Biden tells us, “We have to spend money to keep from going bankrupt”. Well Joe, if infinite spending funded by debt was the key to economic prosperity the United States and the American people would have nothing to worry about. Here’s a graph detailing the debt in the United States-

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Debt in the US

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The average household in the United States carries 8,000 dollars in credit card debt, not to mention the outrageous mortgages individuals took out during the housing bubble. Biden argues all those people have to do is spend more money and they won’t go bankrupt. Huh? If what he says were true I have no doubt the American people would be more than happy to oblige, but thankfully reality tells us a different story. There is an old saying that when you find yourself in a hole the first thing you do is quit digging. This truism seems to taken hold of the American public. Bloomberg reported in June,

“Government data today showed that the household savings rate rose to 6.9 percent in May, the highest since December 1993, as personal spending increased less than incomes. The rate in April 2008 was zero.

It shouldn’t be surprising that households are being forced to save more, they are drowning in debt. Many people find their houses worth less than their mortgage and realization the credit card debt they racked up during the boom is a lifetime burden. Only a fool would tell people to spend MORE money they don’t have when they are already underwater in debt. Those same fools display an understanding of economics comparable to a toddler (in Biden’s case I would say a toddler understands more than him). They fail to understand the role savings has in an economy. Absent the Federal Reserve’s printing press, banks are only able to lend money deposited into their bank. In a free market where the Federal Reserve does not place price controls on interest rates, interest rates serve as price signals to entrepreneurs. Interest rates follow the rule of supply and demand, when supply is low and demand is high interest rates increase and vice versa. The supply for lending comes from ordinary people deferring present spending to the future. With the Federal Reserve the principle of supply and demand in interest rates is thrown out and price fixing is instituted. The price fixing allows the FED to artificially lower and raise the chief interest rate. When the FED lowers the rate artificially it sends a message to entrepreneurs that there is an adequate increase in savings to justify rates being the low rates. No such savings exist however; the new money is merely freshly printed Federal Reserve notes. This distortion of the markets leads to malinvestments best described by Ludwig von Mises,

“The essence of a credit-expansion boom is not overinvestment, but investment in wrong lines, i.e., malinvestments.”

Our government has succeeded in repeating the same mistakes of the boom years and these will only delay the inevitable consequences. Talk of green shoots is nothing but political misinformation designed to deceive the public into going along with the governments schemes. Nothing has changed in the economy; the malinvestments still exist thanks to the bailout of companies who deserved to go bankrupt. How is it possible to have green shoots when the economy is losing 200,000+ jobs per month? How is it possible to create new prosperity when the federal debt is closing in on twelve trillion dollars? A recovery is nowhere to be found in our future; households have spent three generations of debt and it must be paid down before a true recovery can begin. Estimates are that the United States private households have over 44.2 trillion in debt that must be paid off. This will be a long painful process and every time the government institutes a new hair brained program, it only delays a recovery. The economy will not see a recovery until the malinvestments are allowed to be liquidated and everything done to “fix” the economy will make it longer and more painful.