Saturday, January 2, 2010

Lessons of 2009: not all wrongs are wrong

Make no mistake, reality is often very far away from fantasy. What we think we know almost always does not turn out like we think it will. Or as the aphorism says,”we don’t get what we expect, we get what we deserve.” We overestimate our best guesses and underestimate our worst guesses. Behavioral psychologists call this the anchoring hubris, which directly affects the way we assess probabilities. Everyone is affected by it, including yours truly. That said, as I look back to 2009, one of my prediction related to a significant contraction in the stock market during the fall. It obviously did not happen that way. As I assess the breakdown in estimation, I come to the conclusion that the anchoring hubris got the best of me. However, I still stand by the gist of my prediction: chiefly that an economic crisis that will pale the last one, stemming from unprecedented market interventions, is on its way. The only caveat is that this time I will not attach a particular time frame, since the effects of the implementation of “Keynesian” monetary and fiscal policies may last longer than anticipated. I expect there to be lingering effects, even after exit strategies are implemented. But my expectation that a major stock market reversal and a catastrophic economic environment (including social unrest) are coming upon us almost certainly is a foregone conclusion.

The problems with the American economy are irreversible. Debt has continued to balloon. This was not only a problem of the Bush II administration; the root of the debt problem lies in the breakdown of the international monetary gold standard in 1971. If prior American Presidents drove at the speed limit in terms of American debt, then current President Obama would be pulled over for excessive speeding. Over the last couple of years America has added more debt to its economy than the combined period since its independence. This debt will never be repaid, despite political rhetoric claiming otherwise. How do I know his? Ask yourself this question: how can an institution that is effectively bankrupt pay it bills? The obvious answer is that it can’t. Connected to this problem is the future of the U.S. dollar. The Federal Reserve has printed more little green papers unlike any other time in American history. The adjusted monetary base has more than double (to about $2 trillion) since the beginning of the credit crisis. Among the ultimate effects of these policies are an increase in interest rates and price inflation, not to mention social unrest.

I wish I knew exactly when the manifestation of these events will happen because measuring the Keynesian policy effects has been challenging. However, this does not abrogate the fact exquisitely stated by Ludwig Von Mises, "There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved." Not all wrongs (my timing judgment) are wrong. Whoever has ears to hear, let him hear.


arosales said...

your insight and comments on political economy and finance continue to be a refreshing break from the general "consensus" portrayed by the media.

I strongly believe that the return to basic economic principles will be a rocky road but also inevitable. As the government pushes to expand its influence and control on the US, financial markets and global economy, the US taxpayer will ultimately receive the bill and be appalled.

The day of reckoning can perhaps be avoided with a day of economic and financial reconciliation of (based upon the common sense concepts of Austrian and orthodox economics):

- living by our means
- there is no such thing as a free lunch
- the role of government is not to be an agent of social change
- individual responsibility and liberty are much more urgent than bailouts, stimulus packages and continued debt
- sound money and stable growing markets

I've always admired your thinking Cesar, but in the past year as I've familiarized myself with Austrian economics and built upon basic economic concepts, I've come to believe in your vision and insight for the future. I believe that although many of your writings are alarming and not pleasant, that you are, ultimately, an optimist. The situation can, and must be changed.

Cesar Garcia said...

Indeed, Alejandro, I am an optimist. I do believe with all my heart things can change. I am merely exposing the wrongs in our society, so as to know what needs to change. To paraphrase what Einstein once said: you can expect different results doing the same thing. Well, this is where we are when it comes to economics and politics.

See my next post on Bill Gross. My views are against the grain, but not unique by any stretch of the imagination.