Sunday, August 15, 2010

Inevitable Impossibilities

Many economists are suggesting that our government continue pushing our economy in the same direction that caused The Tech Bubble, The Housing Bubble, The Credit Bubble, The Subprime Crisis, The Banking Crisis and The Great Recession.

As each of these economic events occurred these same economists were surprised by them. Each bubble or crisis was an outlier that was one of the last possibilities that they had expected.

Economists have stated that these outliers are “Impossible” to predict. This is ironic because, in my opinion, each of these economic events seems like the “Inevitable” outcome of bad government policy.

So in essence they are “Inevitable Impossibilities”.

As the government continues to push our economy in the same direction that caused all of our previous crises we are very likely to incur more “Inevitable Impossibilities”.

· The “Inevitable Impossibility” of increasing interest rates: Our nation’s interest rates have spent the last 30 years on a continuous trend almost straight down. A significant percentage of our nation’s economic growth is predicated on the continued contraction of interest rates forcing ever more gains from our extremely overvalued bond and real estate markets. Although it is an impossible event to economists, there is a distinct possibility that interest rates will increase in the future. Economists don't understand that as interest rates increase, bonds and real estate prices decline proportionally. So as our Federal Reserve is forcing rates artificially lower it is proportionally increasing the size of the inevitable crisis in the future.

· The “Inevitable Impossibility” of Living With-in Our Means: As a country we have been able to live beyond our means by borrowing resources from the future. We started by tripling our debt load to GDP over the last 30 years. When our individual credit ran dry we learned to use the government in our stead to borrow money from hostile foreign nations in the name of our grandchildren. Although economists feel that it is very unlikely, it is possible that during our lifetime we will be forced to stop robbing resources from our kids. As we continue to steal from our children it is just creating a bigger problem in the future.

· The “Inevitable Impossibility” of Free Investment Markets and Fair Wages: The government has usurped many of our formerly free markets. Interest rates are controlled by our political officials. The mortgage market is run by our government. Political policy sets most wages in the country with massive subsidies to the non productive sectors and huge tax burdens to the productive ones. Presently our elected officials have created a perfectly imbalanced economy where the financial sector earns twice and much as the government sector. And the government sector earns twice as much as the private sector. If the invisible hand of government stopped subsidizing the non productive sectors of the economy, then money would come flooding into the productive private sector. This would cause equally proportionate private sector employment growth with subsequent unbridled prosperity and possibly inflation. We are forcing more and more money out of the private sector. This is creating a bigger inflation problem once the flow of money starts to enter the private sector again.

All the examples above seem to be the most likely culmination of bad government policy because:·

  1. Interest rates can’t be artificially manipulated any lower than they are now.
  2. Asset prices can’t be artificially held above historical fair value forever.
  3. We can’t live beyond our means forever.
  4. In a democracy the government can’t control markets to reward political favorites forever.

But all of these logically “Inevitable” outcomes are not even among the “Possibilities” of our economic community. Economists say interest rates must be lower, asset prices must be forced higher, we must continue to borrow and spend. And absolutely the government is our savior.

For some reason, the most likely outcome of each of these “Inevitable Impossibilities” seems to lie far beyond the scope of our current crop of economic theorists to predict.

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