Pardon the rant, but this absolutely has to be said. The "recovery" right now is being almost entirely based on policies that are unsustainable.
This is hugely relevant not just to the next few months, but far more importantly for the future of markets, currencies, and politics for the next half century. The mistakes we're making now could cost us for decades.
Let's review the major myths of Bernanke and Keynesian economics, and then discuss long-term strategies for surviving the weather.
"We'll Stop When the Economy is Fixed"
One of the fatal flaws of big-government Keynesianism is the notion that the government will turn off the inflation faucets at just the right time -- or that they'll even know when to do so -- or that there won't be huge consequences to the faucets being on in the first place.
All three of those assumptions are deadly wrong, as we'll be watching over the next several decades.
First the three basic myths of government economics:
- "They'll stop when they should." The government is run by politicians who are worried about their own salaries. Call it the tragedy of the commons, DC style. Bernanke, for example, knows he'll get fired if Obama loses the election -- that means he has a huge long-term incentive to create a short-term "pop" for the economy. He's not alone -- that's why the Fed has been creating short-term trouble for years, and that's why we have a recession in the first place.
- "They'll know when to stop." Ben Bernanke didn't see the housing bubble coming. In 2006, he said housing prices would keep increasing. He also said derivatives were safe because they were used by experts. In 2009, he announced a recovery, and unemployment kept skyrocketing. The Fed will not magically know when to stop the money flow or the easy credit flow.
- "Artificially heap and inflated money is good." Unfortunately, artificially cheap money leads to the misapplication of resources. Sometimes it just creates bad investments and other times it creates obvious price bubbles and crashes.
The last myth is the most dangerous, because it refuses to die.
Free-market prices exist for a reason -- they function as little indicators as to what the market is evaluating the raw economic capital required for goods and services -- not just the actual "stuff", but the capital mixed with scarcity.
That's why diamonds are worth more than sand and that's why a Ford (F) truck is more expensive than most tricycles. The prices help us allocate resources efficiently.
This doesn't mean that free-market prices are always "correct" or perfectly efficient -- it's just an important indicator. It's a message to the market, if you will.
When you mess with prices, you mess with the signaling, and resources begin to be miscalculated and spent incorrectly.
For an example of this, just look to education -- the student loan bubble and the college costs bubble are a great example of easy credit and government subsidies manipulating the entire higher-education market, causing plenty of students to now go to college just to "keep up" with other students. It's a classic example of a bubble.
It's also starting to show signs of a burst, as Zero Hedge has reported.
Every bubble begins with the same innocent-sounding naivety. "Nothing is more important than education!" "Everyone deserves to live in a house!" "This bull market is different than last time!"
Why Bubble-Economics Don't Work
And that's just it. I'm sorry, but the economy doesn't just automatically correct itself. There is no monolithic "economy" that exists outside of individual lives and actions.
If the market wouldn't allow for an individual to buy a house without some sort of artificial lowering of the cost, then that individual would have put his capital elsewhere.
The same goes for college. It might explain the growing structural labor market problems we're now having -- there are millions of jobs that require skills, but too many people are licking their debt wounds from liberal arts degrees (not that some liberal arts degrees aren't wonderful choices, sometimes). It's misallocation.
Even then, it's inflation-based misallocation. It's debt-based misallocation. This doesn't even touch on the budget problems of the future or the fact that the poor are suffering worse now than ever because of rising food prices.
Right now, a lot of the money the Fed is trying to print still hasn't made it into full circulation yet. As that money does enter circulation and the Fed considers when to start QE3, we can be certain that the money will go away from good choices and toward manipulating market prices in a destructive manner.