Deadman's picture

    What goes up, must come down ....

    I believe in balance. In yin and yang. I believe in cycles. In symmetry. I believe big wild parties end with big, nasty hangovers. I believe that what goes up, must come down.

    Unfortunately, our government does not agree.

    I have railed time and time again on this blog about the scattershot and shortsighted nature of our economic response so far to the current financial crisis. In short, and with few exceptions, said strategy has consisted of spending as much money as possible to bailout and stimulate every sick, depressed segment of our economy, with a particular focus on those segments that cater to the rich and connected.

    The policies of the incoming Obama team will only accelerate this process, albeit with a more tilted and welcomed focus on some of the not-as-rich-or-connected folks. There is talk of a new $1 trillion stimulus package being created early in the Obama presidency.

    The Fed is fully aboard the stimulus party as well, yesterday slashing the fed funds target rate to basically zero and committing to buying mortgage assets to ensure long-term borrowing rates move lower in an attempt to stabilize and boost the housing market. There is even talk that the government will FIX interest rates at a certain level to ensure they accomplish that goal, though for now it appears the mortgage market is responding to the unprecedented stimuli.

    Look, no one likes to see suffering. People out of work, going bankrupt. Home prices falling. Factories closing. Cities failing. It's nasty, nasty stuff. For politicians, it tends to lead their own unemployment. And for economists, it's a scary scenario as well, because it almost always results in deflation, a pernicious problem that tends to have long, strong roots once it sets in.

    But did the Fed or government do anything when times were so good, when the price of housing was soaring to the moon and consumers were levering up to the hilt and taking on dangerous levels of debt???? Aside from nominal increases in interest rates, I don't remember any concerted effort, and certainly nothing approaching the desperation we've seen recently, to try and tame the animal spirits and gently guide the economy into a soft landing.

    In my opinion, you can't have it both ways. You can't have bubbles without crash landings. We have stemmed the worst of the credit crunch and liquidity crisis - interest rates have fallen, banks are lending a bit again (at least to each other). It is now time to let the market work its way through this mess and find its equilibrium level. Yes, it will likely overshoot on the downside, just like it did on the way up. Yes, it may take longer to find that equilibrium level than we'd like. But you gotta take the yin with the yang.

    I'm not saying we should sit on our hands and watch helplessly as the economy craters. By all means, spend money to reinvest in our roads and infrastructure; on new technologies, including alternative energy; on education, including the retraining of displaced workers; on strengthening the country's safety net to ensure that those hit hardest from the economic collateral damage don't suffer unduly.

    But realize that all this profligacy will have consequences down the road. We are already staring down the barrel of the worst demographic situation in decades - as the baby boomer generation is getting ready to retire en masse, placing a huge burden on this country's resources as they move from being net producers to net consumers.

    When times were better and tax revenues were flush, our government did nothing to reduce our budget deficit in any meaningful way or address long-term systemic issues threatening the economic health of our nation, like Social Security and Medicare. Yet it now has no problem dramatically increasing our country's burdens and obligations in order to try and avoid the bad end of the business cycle.

    The only thing all this spending will do is take away the oomph from any subsequent recovery. We'll see a weaker dollar, higher inflation, bigger deficits, and higher taxes down the road. At least some, and maybe a lot of this money will be misplaced, leading to bubbles and wasted investments in other unforeseen areas.

    But frankly, the prospect that most of this stimulus will be wasted, a misguided attempt to set an artificial floor on the economy, is actually not the worst-case scenario (though it is the most likely). My biggest concern is that the stimulus works too well and our animal spirits are revived before they've had a sufficient chance to reset. If that happens, we'd only be setting ourselves up for a bigger, more painful crash down the road.



    I wonder if there will be much of a recovery.

    I do love when you blog on this stuff. In response, welcome to the 21st century. Everything is bigger, faster, stronger and will progressively continue to be more so. The Red Bull souped up, multi-tasking, all-knowing, all sensors stimulated culture will not stand for slow growth or deterioration. Everything must be swift, painful and historic. 35% down days, 28% up days, 3 million monthly job cuts, $4 trillion stimulus packages I'm afraid are going to become the norm. Time is becoming increasingly valuable, too valuable for tedious L-shaped recessions. Our ability to handle these swings quickly and effectively will either become an evolutionary step or lead to our ultimate downfall. All-or-nothing, just how we've come to like it. 

    We're not addicted to spending or to things. We're addicted to instant gratification. That's why we don't save money. That's why we buy whatever we want, whenever we want it. That's why investors aren't adopting a wait and see attitude and the markets make Six Flags look like the kiddie rides at the state fair.

    What's the solution? How can we teach ourselves to be patient again when we've spent the last twenty years behaving like spoiled children? Maybe Obama needs to give us all a lengthy time out.

    Thanks Mort-dog for the props, tho I gotta tell you I am SICK of writing about the economy and only do it when the outrage reaches that magical boiling point.

    What's really be getting me is that nearly all of the economists and pundits I've been hearing have been suggesting that all this stimulus is necessary, and we'll worry about the consequences later.

    Frankly, everyone is using the '30s as the blueprint for what not to do and what to avoid. No one wants to go down as a Hoover, as someone who did nothing to try to stimulate the economy or mitigate the pain and suffering of Americans.

    That may be the right tack to take, but I know that the world is a lot different than it was back then. The enormous size of our deficits, the dramatic extent of our bubbles, the global reach of the crisis, all have their own unique qualities that will likely make whatever happens next different than what happened then.

    And these are the same economists and pundits who had NO FRIGGIN CLUE that shit was about to hit the fan. Gimme the name of 10 economists from last summer who predicted we were about to enter the worst downturn since The Great Depression.

    Yet we are supposed to have faith that they will outsmart the market, and allow us to have lots of yin and very little yang??

    Nice post, D. I don't know enough to comment myself, so I wrote to a wise econ professor I know. He had the following to say:

    The Yin-Yang Theory of Economics, first proposed in 87 B.C. by the noted Chinese economist and philosopher, Dr. Yinga Yanga, is widely accepted throughout Asia. By contrast, a related hypothesis, the What-Goes-Up-Most-Go-Down Theory of Economics developed by a John Bear, a disciple of Adam Smith, has been largely ignored and occasionally ridiculed by Western economists, investors, and pretty much everyone except for those few dour souls who spent the 90's whining about inadequate PPEs.

    Broadly interpreted, both theories, have effectively predicted historical economic cycles, insofar as economic growth throughout the world has repeatedly gone up-and-down-up-and-down like a drunken sin wave. But as predictors, these theories are hardly precise. While there is certainly a yang for every yin, sometimes the yin kicks yang butt or vice-verse.

    I recommend the Hangover's Suck Ass Theory of Economics, developed by 18-year-old prodigy John Blutarsky one bleek Sunday morning last year. This theory offers a correction to the standard Yin-Yang model. While it acknowledges that you cannot party without a hangover, economically speaking, the pain and duration of the hangover cannot be predicted. Based on that assumption, he argues persuasively that when the party's over, you should quaff water like a parched elephant because you never know if the next hangover will reduce you to a pathetic mound of quivering jello, economically speaking.

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