Although Barack Obama has refrained, at least for now, from delivering
triumphant speeches in a naval flight suit, there is nevertheless a strong tone
of accomplishment emanating from the United States president and his deputies.
Over the weekend, top White House economic adviser, Lawrence Summers, even
pronounced that the recession was now over. Without hedging his bets, Summers
declared that thanks to the Obama administration's wise stewardship, economic
stimuli and emergency bailouts, another Great Depression, set up by the prior
administration, had been narrowly averted. Summers saw no impediment to the
return of sustainable growth. He may as well
have delivered these remarks from the deck of an aircraft carrier, in the
manner of president George W Bush, who delivered a speech on Iraq from the USS
Abraham Lincoln in front of a banner proclaiming "mission
accomplished".
I hate to shoot down these high-flying expectations, but the economy is not
improving. All that has changed is that we are now more indebted to foreign
creditors, with even less to show for it. Washington's current policies have
once again deferred the fundamental, market-driven reforms needed to redirect
us onto a sustainable path. Instead, through aggressive monetary and fiscal
stimuli, we are trying to re-inflate a balloon that is full of holes. This was
the Bush administration's exact response to the 2002 recession. It's shocking
how few observers note the repeating pattern, especially the fact that each
crash is worse than the last.
Obama's claim of success largely derives from the slowing tally of job losses,
the seemingly renewed strength in the financial system, the pickup in home
sales and home prices, and the positive gross domestic product (GDP) figures.
But these "achievements" fall apart under close examination.
First, a closer look at the jobs numbers shows that employment improved in
sectors that benefited most directly from monetary or fiscal stimulus:
government, healthcare, financial services, education and retail sales.
Meanwhile, sectors such as manufacturing continued to shed jobs at an alarming
rate.
These dynamics actually exacerbate our economic imbalances. Recent trade
deficit figures (in which the deficit-reduction trend of early 2009 has sharply
reversed) show how this employment growth is preventing needed rebalancing.
Essentially, the administration is nurturing firms that cannot survive without
subsidies and support.
Once stimulus is removed, the "saved" jobs will be among the first to go. If
the president has not figured this out yet, I am sure Federal Reserve chairman
Ben Bernanke has. As a result, the market should discount as pure bluff any
claims from the Fed about an eventual "exit strategy" from current stimuli.
Such an "exit" would bring about Bernanke's greatest fear - spiking
unemployment.
Second, major investment and commercial banks are not back on their feet but
remain fundamentally insolvent. Their current business model of risk-free
speculation depends upon the maintenance of government backstops, the continued
availability of cheap money from the Fed, and the use of accounting gimmicks
that allow them to conceal losses behind phony assumptions.
Third, while it is true that home prices have stopped falling, this represents
failure, not victory. True success would be a drop in home prices to a level
that potential homebuyers could actually afford. Instead, we have maintained
artificially high prices with tax credits, subsidized mortgage rates, low down
payments, and foreclosure relief.
With 96% of new mortgages now insured by federal agencies, market forces have
been completely removed from the housing equation. With so many government
programs specifically designed to maintain artificially high home prices,
devastating long-term consequences for our economy are inevitable.
Finally, it is true that the GDP yardstick shows an economy returning to
growth. However, as I have often repeated, this measure has deep flaws that
render it almost useless for judging the soundness of an economy. Currently,
the figures are merely reporting increasing indebtedness as growth. Using GDP
as the main financial indicator is equivalent to judging a man's success by the
cost of his house, car, and wristwatch. Rather than gauging income, these
figures merely indicate a level of spending and have nothing to do with earning
power.
Paul Volcker, the only independent voice in the administration and a former
Federal Reserve chairman, has not been deceived by his colleagues' sunny
claims. He recently noted that our economy still evidences "too much
consumption, too much spending relative to our capacity to invest and export"
and that the problem is "involved with the financial crisis but in a way [is]
more difficult than the financial crisis because it reflects the basic
structure of the economy." Yet, President Obama has chosen not to address these
concerns.
As Summers and Obama like to point out, the vast majority of economists take it
on faith that, with the right finesse, the stimulus can be withdrawn without
pushing the economy back into recession. But based on the distortive effects of
stimuli and bailouts, our economy has adapted to a climate where cheap credit
is not only plentiful but critical.
Eventually, the cheap credit will dry up. Not because the Fed decides it should
but because our foreign creditors stop lending. When that happens, this
administration will look as clueless about economics as the last one was about
the pitfalls of nation-building.
But for now, the chattering classes believe strong government action has
delivered us from calamity. For them, at least, it's "mission accomplished!"
Peter Schiff is president of Euro Pacific Capital and author of The
Little Book of Bull Moves in Bear Markets. Euro Pacific Capital commentary and
market news is available at http://www.europac.net
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