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The GDP numbers out yesterday, which showed economic
growth at 3.5% in the third quarter, brought a deafening chorus from public
and private economists who all agreed that the recession is officially over.
With such a strong report, they are happy to tell us that not only has the
Fat Lady finished her aria, but she has left the building and is sipping
champagne in the bath. As usual, it falls on me to rain on the parade.
Even the giddiest commentators admit that the upside
GDP surprise resulted almost entirely from government interventions. But, by
pushing up public and private debt, expanding government, deepening trade
deficits, and pushing down savings rates, these interventions have succeeded
only in putting our economy back on an unsustainable path of borrowing and
spending. Accordingly, they have prevented the rebalancing necessary for
long-term health. Could there be a simpler illustration of trading long-term
pain for short-term gain?
Rather than asking these pre-K economists to make
such a three dimensional leap, it may be easier just to give them a brief
history lesson.
During the decade that corresponds to the Great
Depression, annual GNP expanded for six years and contracted for four. After
nose-diving in the early years of the decade, GNP turned positive in 1934 and
then logged three more years of solid growth (the four year average annual
growth rate was 8.5%). But does anyone really believe the Great Depression
ended in 1934, when the economy first stopped contracting? Unemployment
reached 19% in 1938, nearly the peak of the entire Depression, almost a full
decade after the stock market crashed! Why will we be so much luckier this
time around?
The unpopular truth is that rather than curing the
economy, government stimulus has made it sicker. The Bush Administration and
the Greenspan Fed pursued this policy recipe in the 2002-2003 recession. The
result was four years of phony growth, greater global imbalances, and the
development of unsupportable asset bubbles. Clearly we have learned nothing
from those mistakes.
Third quarter 'growth' was largely driven by a 23%
increase in residential construction (the largest quarterly increase since
1986) and a 3.1% increase in consumer spending, which included a 22% jump in
durable goods purchases - mostly automobiles - and 2.3% gain in government
spending. Since the increase in consumption outpaced the increase in
production, the trade deficit expanded, reversing the positive trend for most
of 2008 and 2009. Because the increase in spending outpaced the increase in
incomes, the savings rate plunged from 4.9% in the prior quarter to 3.3%.
The sizzling numbers for housing and autos resulted
from heady cocktail of policy stimulants: near-zero interest rates,
government-guaranteed mortgages, Federal Reserve purchases of
mortgaged-backed securities, tax credits for homebuyers, bailouts for auto
finance companies and 'cash for clunkers' for car buyers.
But the last thing our economy needs is for scarce
resources to be wasted through uneconomical incentives.
If the government were not 'stimulating the economy,'
higher interest rates and falling home prices would have hamstrung
residential construction. That would have been the right move. Instead, based
on the false economic signals of the 'stimulus,' we continue to build houses
for which no legitimate demand exists.
The same is true for cars. Because of stimulus
money, Americans are buying cars that they otherwise would not have. In a
free market, the money would have been used for a more constructive purpose.
Perhaps it would have been saved, used to pay off existing debt, or spent on
a less expensive mode of transport, like a used motorcycle.
The economy ran into a wall in 2008 because
consumers bought houses and cars that they really could not afford. That is
why the institutions that provided the loans, such as banks, Fannie &
Freddie, and GMAC, went bankrupt. It should be obvious that the solution to
our economic problems will not be found by redoubling these efforts. This is
akin to a drunk having a few more drinks in order to get sober!
A recent article in the Wall Street Journal
detailed the myriad ways in which Senators and Congressman are now compelling
General Motors to make business decisions that are solely driven by the
legislators' own political considerations, not the best interest of the taxpayers
who now own the company. Such a dynamic is now underway in nearly every facet
of our economy. An efficient allocation of resources - the only path to
economic growth - is only possible when market forces, not Beltway
bureaucrats, call the shots.
In the end, this stimulus, just like prior doses,
will only worsen the condition it is meant to cure. When it wears off, the
resulting recession will be even bigger than the one that everyone assumes
has just ended. Until the impulse to fight recessions with government
stimulus is quashed, genuine economic growth will never return. A string of
ever-worsening recessions will eventually lead to what will be the next Great
(Inflationary) Depression. But for now, enjoy the bubbly.
Peter D. Schiff
President/Chief Global Strategist
Euro Pacific Capital, Inc.
20271 Acacia Street, #200 Newport Beach,
CA 92660
Toll-free: 888-377-3722 / Direct:
203-972-9300 Fax: 949-863-7100
www.europac.net
pschiff@europac.net
Also
by Peter Schiff
For a more in
depth analysis of the tenuous position of the American economy, the housing
and mortgage markets, and U.S. dollar denominated investments, read my new
book : The Little Book
of Bull Moves in Bear Markets" (Wiley, 2008).
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