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Sometimes in my
mind I like to compare engineering and economics. In my revelry I think about
what engineering would be like if Isaac Newton had been indisposed looking at
a feather and hadn’t noticed the apple fall from the tree. Gravity
would be represented a little differently in our science text books.
Buildings would tend to collapse under their own weight. Our engineering
schools would need to produce more and more engineers because we would have
to rebuild our bridges every 5 years instead of once every 100 years or so.
The pay of engineers would be higher than almost any other profession because
of the demand.
I guess Newton kind of blew it for the engineering field.
But the good news is that all of the people that would have become engineers
are now becoming economists. This is because of the same scenario that I stated
above. Just replace gravity with debt. Gravity to engineering is exactly the
same concept as debt is to economics. But the boon to the field of economics
is that the concept of debt has been eliminated from all of our economics
textbooks. The only variable that is represented now is the debt payment.
So theoretically an economy can have an unlimited amount of debt if interest
rates are at zero. This is such a compelling concept. When Ben Bernanke said
that our government could prevent recessions it sounded almost magical. I
kind of got a feeling of feathers and zero gravity. Or actually it was like a
Care Bear on a cloud feeling. The economists will always be there to rescue
us with limitless debt.
But my euphoria only lasted for a little while. I have a degree in economics
but unfortunately I am also an accountant. So I did the math and sold my home
in 2007 with the intention of renting for an extended period. I also shorted
the stock market in 2008 when every single economist in our country was predicting
blue sky forever. I jumped into the stock market as prices collapsed in late
2008 and now I am market neutral. I will short the stock market in the fourth
quarter of 2010 and then buy in at good value sometime in 2012. I probably
won’t buy a house again until at least 2013.
As the economists are making the economy more and more challenging, we are
training more and more economists. Sometimes I think that it would be a good
idea to pay them not to do anything. Kind of like farmers, only instead of a
$20,000 crop subsidy it would be a $1 million bonus payment for not creating
any more expensive, complicated and risky investment products that
underperform the stock market. In the long run this would save our country a
whole lot of money.
But this is not my beef with economists. I don’t buy any of the
expensive, complicated and risky investment products that underperform the
stock market. So that doesn’t affect me directly.
My gripe is that economists don’t think like engineers. They think of
themselves as fluffy Care Bears. When we have economic prosperity they float
on their cloud ignoring any kind of regulation or fiscal or monetary
constraint. This would be the “kids are having fun don’t bother
them” theory. They call it “free market theory”. But if our
economy hits a slight rough patch then they down a quart of Red Bull and bolt
from the Heavens to save us from absolute destruction with micro managed
market manipulation. This theory doesn’t have a name so I just call it
“Care Bears to the Rescue”.
There is no science to being a Care Bear. Especially when most of the Care
Bears work in our financial sector and wear $5,000 suits and drive Porsches
paid with government subsidies. This dynamic was never discussed by Adam
Smith.
The economists may think of themselves as Care Bears but they react more like
rats at a feeder bar. They only understand the need to press the liability
lever faster to make the economy grow. The faster they push the lever the
more they are paid by the government and the financial sector.
I admit that a little bit of leverage can increase a nation’s standard
of living. But as an accountant I can tell you that there is a point where
more indebtedness does not create more long run growth. We reached that point
in the housing market in 2004. At the time I tried to explain this fact to
anyone that would listen. I had charts and historical data to back up my
claims. But accountants are party poopers. Everyone wanted to listen to the
economists who guaranteed that housing would continue to skyrocket above
affordable levels forever.
Today we have yet another bubble that is just as irrational. Instead of the
homeowner ATM creating unlimited prosperity our economists are telling us
that the taxpayer ATM will propel our nation back to the glory days of yore.
Like The Rime of the Ancient Mariner the story remains the same. The
albatross is destined to be carried around the neck of the taxpayer, forever.
We have tripled our nation’s debt load compared to GDP in the last 30
years as our government and financial sectors have become as obese as our
populace. The goal is to starve our “productive” small business
and manufacturing sectors with higher taxes while our
“destructive” government and financial sectors get Super-Sized
subsidies.
The economists’ plan is to continue borrowing from the taxpayer ATM for
the next 10 years even though our government has not paid back a single
dollar of the national debt for the last 30 years.
“Hey wait”, you say, “didn’t we pay back a little
during the Clinton administration back in 1998 or something like that?”
Please do me this favor. Raise your hand and point to the stars. This has
been the path of our debt for the last 30 years on a chart. Now where along
that path that goes straight up did we pay back any of our government’s
debt?
Yes, we have debased our currency and made a small portion of payments go
away over the last 30 years. Yes there might have been an accounting error
that allowed a tiny bit of fiscal surplus for a very short period of time.
But the truth is that our government and the Care Bear Economists have not
paid down our “real” debt load in 2 generations.
So let me rephrase this very important point. We weren’t able to muster
the self-control to pay down a dollar of debt during the last 30 years of the
best economic period in our country’s history as interest rates were
falling sharply. But now we are planning on doubling our debt and then
waiting to pay back the $60 trillion liability in “stated” and
“unstated” debt during possibly the worst economic period in our
country’s history as interest rates shoot to the moon.
This is all I know. There is absolutely no math in accounting that makes this
policy decision tenable. Making extreme debt disappear with more debt
can’t be quantified with numbers. Logically it is irresponsible and in
my mind it appears irrational. Also, never in human history has a country
been able to borrow itself out of extreme debt without having problems.
Rising interest rates make this strategy virtually impossible without a
penalty. The consequences could be stagflation or hyperinflation or a mild
economic collapse. History tells us that the larger the debt to GDP ratio of
a country then the bigger the consequences.
We currently have record setting total debt compared to GDP in our public and
private sectors. Anyone that tells you differently is an economist or is
getting information from an economist. They are trained to ignore the
accounting balance sheet. This ignorance has allowed our nation’s
economists to help the government and the financial sector balance their
books by hiding tens of trillions of dollars of future liabilities. It is
illegal for accountants to misstate their balance sheets but in economics it
is rewarded. Economists get paid high salaries to suggest ways to hide debt
so our government and our financial sector can borrow ever more money:
· Before the financial crisis our nation’s largest banks that
are subsidized by taxpayer dollars were leveraged 30 to 1. An impossible
number in accounting but for economists it was definitely no problem.
· The fact that our nation has not paid back a dime of it’s debt
in 30 years is also not a problem. Economists are sure that more red ink will
make this government lard melt away quicker than the fat from a chicken fried
steak in a George Foreman Grill.
· And as for the future government deficits created by reckless
spending for at least the next 10 years. Whataya kidding? There is no problem
here, please move along.
Money is usurped and the bill is sent directly to the taxpayer.
Rationalization is not required. And in the case of The Federal Reserve,
documentation is not even required. The largess that is passed by savers to
the government and the financial sector by currency debasement and
artificially manipulated interest rates is all under the table, so to speak.
The public sector is an economist’s dream and an accountant’s
nightmare.
Sometimes I ponder the fate of Andrew Fastow, the CFO of Enron. If he was an
economist, instead of sporting an orange jumpsuit he could be wearing Armani
and raking in a huge salary working for some heavily subsidized quasi
government organization while giving highly paid speeches espousing free
markets. Who knows, he might have at least one Nobel Prize under his belt by
now.
At this point, I really need to know something from our next Nobel Prize
winner. Mr. Bernanke, could I actually see the chapter in the economics text
book that says borrowing more money eliminates carrying an extreme amount of
debt? Is it like two negatives make a positive? Are you sure that
you’re not quoting Adam Sandler instead of Adam Smith? It’s a
joke … right?
But alas it’s not a joke. We are in uncharted waters living in an
economic fantasy world as 300 years of economic thought has been cavalierly
tossed overboard. The knowledge of the financial geniuses of the past has
been replaced by an Orwellian world where producers will be brutalized with
high taxes in the future so speculators who make idiotic bets can be made
whole today. The government is manipulating every aspect of our economy to
keep our markets free. Savers are demonized and forced into the purgatory of
zero interest rates as indebtedness is held up as our savior.
The Care Bear Economists keep hitting the liability lever as money pellets rain
down from the financial sector and the government.
Can things get any worse? You better believe that they can. Just keep
listening to the economists.
The fact of the matter is that our nation’s future economic problems
will be 100% debt related. Unfortunately our economists are functionally
illiterate in this area. As our nation’s debt becomes more of a drag
their analysis will become even more useless.
Honestly, hasn’t their analysis been useless for the last ten years?
Nobel Laureate Paul Krugman wrote an article about this fact called
“How did economists get it so wrong?” But ironically he
didn’t mention our country’s extreme debt load or even the idea
of debt. So in essence he has it wrong also.
Bigger government and a bloated financial system make absolute sense to the
Care Bear Economists. This is who pays their salaries. And in the future they
will float to the taxpayer’s rescue once again with suggestions of even
meatier pork for the government and ever larger bailouts for our financial
sector. This will create even more jobs for the economists. The rest of us
that don’t pay their salaries won’t be so lucky. Our fate will be
to drag our country’s ever growing burden step by onerous step up the
next interest rate mountain.
Now let us take a moment to predict the growth path of our economy. What are
the chances that a future 10 years of reckless spending by our government
will eliminate our nation’s extreme indebtedness? Does it make sense to
strip future resources from our productive sectors and use them to increase
the size of our nonproductive government and financial sectors today? But
more importantly, will the weight of the burden that we are creating to
increase the size of our nonproductive sectors today become a drag on the
economy as interest rates rise in the future?
In my mind, the controversy between accounting reality and our nation’s
present economic fantasy comes down to one simple question.
Do
you believe in gravity?
Charlie Husen
Tax Home
Charlie Husen owns a tax accounting business in
Pleasant Hill California. You can contact him at charlie@incometaxhome.com.
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