Last fall I wrote that “our stock market is like the Titanic on April 15, 1912. It is living on borrowed time, and all the King’s men and horses are not going to be able to put this Keynesian Humpty back together again.”
Nothing since then has changed that opinion. The stock market is off to its worst yearly start in history going back to 1897. Down 10.03% in the first 12 trading days of 2016, the boys on Wall Street sense that something wicked this way comes and are piling out of stocks to find a hopeful haven in bonds.
At the recent World Economic Forum in Davos, Switzerland, William White, the former chief economist of the Bank for International Settlements, tells us that, “the situation is worse than it was in 2007. Our macroeconomic ammunition to fight downturns is essentially all used up….Debts have continued to build up over the last eight years….It will become obvious in the next recession that many of these debts will never be serviced or repaid.”
Famed British financial journalist, Ambrose Evans-Pritchard of The Daily Telegraph, points out that, “the European banking system may have to be recapitalized on a scale yet unimagined, and new ‘bail-in’ rules mean that any deposit holder above the guarantee of £100,000 will have to help pay for it.”
Says Pritchard: “Combined public and private debt has surged to all-time highs to 185% of GDP in emerging markets and to 265% of GDP” in developed countries, “both up by 35 percentage points since the top of the last credit cycle in 2007.”
Albert Edwards, chief strategist at Societe Generale, one of Europe’s most prestigious investment banks founded in 1864, predicts a massive crash is coming. According to Fortune magazine writer, Chris Matthews, “Edwards predicts the U.S. stock market could plunge as much as 75%. That would be worse than during the financial crisis [of 2008], in which stocks from their peak to trough dropped a brutal 62%.”
The market, of course, may rally somewhat in the next month or two, but it will be a “dead cat bounce.” Further, severe descent lies ahead. The chickens of Keynesianism are coming home to roost.
The Fundamental Cause
This crisis is taking place because of the excessive credit (i.e., debt) expansion on the part of central banks that has been part of Western economic policy ever since 1913. As I wrote in Keynesianism’s Ugly Secret in 2014, such “central bank credit expansion brings about healthy growth like heroin brings about well-being. In the early stages of the process businesses flourish, and the Fed is able to manipulate expansions and slow-downs in a tolerable way. But once an economy becomes thoroughly ‘debt saturated’ from the massive injections of credit over the years, borrowing drops off drastically. This slows the rate of monetary growth by inhibiting the central bank’s power to pyramid credit, which threatens the economy with a deflationary crash. If the Fed tries to stop the deflation with faster and heavier credit expansion, it brings on hyper-inflation and then a crash. In addition to the debt saturation, Fed credit expansion also creates widespread ‘malinvestment,’ i.e., capital expenditures for which there is no genuine demand and which cannot be sustained.
“This is the basic Austrian business cycle theory of Ludwig von Mises and Nobel prize winner, Friedrich Hayek, first formulated in the 1920s, and which predicted the Great Depression of the 1930s. Eventually large loads of debt and malinvestment must build up in any country that expands credit in its banking system irresponsibly. Such debt loads must be worked off before real demand and growth can be restored, which requires a recessionary period. If the credit / debt expansion has reached a high enough level, the result will be a more severe deflationary collapse.”
Establishment financial pundits are, for the most part, oblivious to the real source of why this is taking place because they have bought into the Marxist-Keynesian brainwash in their college years, which maintains that not only is capitalism inhumane, it cannot create enough “demand.” Thus they think that massive Fed credit / debt formation is necessary to create “demand” and make an economy grow.
Yet America’s GDP increased over 500% during the 19th century between just the years 1870 to 1913, averaging 4.3% annually. And real wages for the workingman tripled in the years 1849 to 1915. [The Statistical History of the United States from Colonial Times to the Present, 1960, pp. 91, 141, 409, 413.]
All this took place without a Federal Reserve pumping credit into the marketplace at all, and it would do so again if the Fed was abolished. Fed monetary stimulus is not needed; freedom is all that is necessary for economic growth. But even as brilliant a writer as Evans-Pritchard is blind to this because all he and today’s pundit class know is Marxist-Keynesian ideology.
Thus they recommend that we fire up the engines of government investment to create more “credit” (which is just euphemism for more “debt”) throughout Europe and America. How do we do this? More of the old Keynesian moonshine from the 1930s – deficit spending. This is why we as a nation are over $100 trillion in debt privately and publicly today – Keynesian moonshine [See: Printing Our Way to Prosperity].
James Rickards, who is one of the growing band of perceptive financial analysts outside the establishment, tells us what is coming – helicopter money, which is how the late Milton Friedman described money printing to loan to the government for deficit spending. It is like dropping money out of helicopters to the people. It will definitely get spent because the government will do the spending, where the trillions of Fed dollars via Quantitative Easing (QE) over the past eight years have not found their way out of the banks and into the spending and consuming realms of the economy. This is because the banks don’t aggressively push the QE trillions out to the people as loans. They keep it on their books as protection for a rainy day, which they fear is coming again like in 2008.
Thus the helicopters are being fired up. We will see massive deficit spending on the part of government and Fed money printing to cover it. This will add severely to the national debt and, if big enough, ignite waves of future price inflation. But our government caretakers are in panic mode. QE failed miserably, and they no longer care if they create dangerously more debt and risk runaway price inflation. They will fall back on J.M. Keynes once again and spew trillions of dollars into the economy in coming years via massive government spending programs.
What will be the consequences? One of two scenarios:
- We will bring back the “stagflation era” of the 1970s, only far worse this time, or
- The unprecedented global forces of deflation will prove to be too strong for the Fed’s helicopter money. It will be overwhelmed, and most of the nations of the world will plunge into devastating depressions.
The Federal Reserve lies at the source of this “Hobbesian Choice” of two equally unacceptable disasters now confronting us. It has given us the ever-growing “boom-bust cycles” that have plagued Western civilization ever since 1913. If we in the West cannot come to abolish central bank domination of our economies, then our fate over this next century will be a New World Order in which America and Europe are consumed in dictatorships. Likewise for Russia, China, and the far East. The present Mideast dictatorships, so stultified by Islam, will become even more primitive.
Nelson Hultberg is a freelance writer in Dallas, Texas and the Director of Americans for a Free Republic www.afr.org. A graduate of Beloit College in Wisconsin, his articles have appeared in such publications as The American Conservative, Insight, Liberty, The Freeman, The Social Critic, The Dallas Morning News, and the San Antonio Express-News, as well as on numerous Internet sites.
He is the author of The Golden Mean: Libertarian Politics, Conservative Values
Email: NelsonHultberg (at) afr.org