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A morbidly obese gentleman labored
into Dr. Hayek's office suffering from severe chest pain. The patient also
complained that he was unable to consume his usual 10,000 calorie-per-day
diet; in fact, he was feeling so sick that he could barely scarf down 9,000
calories. He plead that his love for food remained as strong as ever, but his
body just wasn't keeping up with his demands.
After having a thorough look at
the patient, the good doctor could not find anything wrong outside of the
patient's extreme portliness. After a moment of reflection, he delivered to
his patient a troubling diagnosis. He explained that the chest pain stemmed
from the strain the patient's 500lb body was putting on his heart, and that
the lack of appetite was his body's attempt to protect itself from this
imbalance. Dr. Hayek's prescription was simple: the patient had to
dramatically reduce his consumption while undertaking a moderate exercise
program, with the goal of losing 250lbs as quickly and safely as possible.
Dr. Hayek was aware that it would be a physically painful and emotionally
difficult process for the man, but it was the only way to avert a life of
suffering - or even a heart attack.
Unfortunately, our patient
rebelled against such an austere program. He had grown very fond of his
high-calorie and high-fat diet and didn't think that now, when he was already
depressed from dealing with all these ailments, was a good time to deny
himself the few pleasures he had left. In his opinion, the doc's prescription
was just too simplistic. He thought there just had to be a way to have his
cake and eat it - frequently. So, he waddled out of Dr. Hayek's office as
fast as he could, shouting over his shoulder: "I'm getting a second
opinion!"
The overweight gentleman sauntered
across the street, where he found the office of Dr. Keynes. He told the new
doctor about his acute chest pain and lack of appetite, and complained about
the previous doctor's "heartless" prescription. After a cursory
examination, Dr. Keynes rendered his diagnosis: the patient's condition did
not stem from the fact that his gigantic frame was causing undo strain on his
heart; instead, the doctor concluded, the patient's chest pain was merely
causing a temporary lack of hunger. Furthermore, Dr. Keynes argued, the
stress of cutting weight at the present time would certainly prove
detrimental to the man's already weak heart. Therefore, his prescription was
for the 500lb man to each as much as possible, as quickly as possible.
Anything less might cause the man to suffer a heart attack, he noted. Now the
doctor did concede that, at some point in the distant future, it might be a
good idea for the man to shed a few pounds. But for the present, the most
import thing to do would be to consume as much as he could stomach.
The patient left Dr. Keynes'
office with a broad smile. After gorging at an all-you-can-eat buffet, he
momentarily forgot about his chest pain. It looked like he had found his
solution; except, a week later, he died.
The Hubris of Government
The allegory above discusses the
dangers of quackery, whether medical or economic. Right now, economic
quackery - in the form of Keynesianism - has overtaken Washington. American
consumers are trying their best to deleverage. In terms of the story, the
patient is actually trying to lose weight. But the government is blocking
deleveraging and trying to boost consumption. They are forcing food down the
patient's throat. According to the Flow of Funds Report, households reduced
debt at a 2.4% annualized rate ($330 billion) during Q1 of 2010. Meanwhile,
the federal government was piling on debt at an 18.5% annual rate ($1.44
trillion). Since every dollar of government debt is a promise to tax the
private sector in the future with interest, this public spending spree
effectively negated the Herculean efforts of the private sector to return to
a sustainable path.
That's where the arrogance of
Washington is really apparent. Scores of millions of American consumers have
made the decision that reducing their debt burden is in their best interests
right now. But a few hundred individuals in government believe they know
better than the collective wisdom of the entire free market. By leveraging up
the public sector, they have used their power to confiscate our savings. In
short, they are forbidding us from following the common sense path to fiscal
health.
Unlike their forbears, modern-day
Keynesians do not argue just for mollification in the rate of deleveraging.
They seek to significantly increase debt levels in an effort to boost the
aggregate demand in the economy. Apparently, only once the mythical recovery
takes hold due to government spending, printing, and borrowing does a
discussion of deficits become appropriate.
The US has persisted under this
theory for close to a century, though with a declining quality of life.
Unfortunately, the patient has now gone critical. Curiously, the world has
yet to fully recognize our precarious condition, even as they provide us with
life support. Washington is now entirely dependent on the reserve currency
status of the dollar and the continued hibernation of bond vigilantes. Without
these supports, the United States would face complete economic arrest. Rather
than allowing the American people to get back on our feet, Washington is
stuffing us with even more debt. It's almost as if the feds are daring our
foreign creditors to pull the plug. As a consequence, I predict that just as
Dr. Keynes killed his patient, Keynesian economics will kill our economy.
Michael Pento
Senior Market Strategist
Delta Global
Advisors, Inc.
Delta Global
Advisors : 19051 Goldenwest, #106-116 Huntington Beach, CA 92648 Phone:
800-485-1220 Fax: 800-485-1225
A
15-year industry veteran whose career began as a trader on the floor of the
New York Stock Exchange, Michael Pento recently served as a Vice President of
Investments for GunnAllen Financial. Previously, he managed individual
portfolios as a Vice President for First Montauk Securities, where he
focused on options management and advanced yield-enhancing strategies to
increase portfolio returns. He is also a published economic theorist in
the Austrian school of economic theory.
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