Tags: bubble | us | economy | wall

There No Other Option but to Hit The Wall

By Robert Wiedemer   |   Wednesday, 07 Mar 2012 10:29 AM

A front-page article in the Washington Post’s Business section the other day caught my eye. It discussed in-depth a theory of economics called the New Monetarist Theory.

In short, the group of economists who support this theory thinks that deficits are good and can’t cause economic problems. Actually, they help governments solve economic problems. They feel that governments can borrow massive amounts of money and never have to default on their debt because their central banks can always buy their debt with printed money.

They further believe that this printed money won’t cause inflation since it is simply a “balance sheet adjustment” in the economy.

It’s Keynesian economics on steroids. And, to a large degree it is true.

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Government borrowing does help the economy. And, yes, the Federal Reserve, with printed money, can buy EVERY SINGLE government bond Congress wants to sell, if need be. Hence, there is no possibility of a failed Treasury auction and no need for a default even if government debt became incredibly massive.

The one flaw in this plan is inflation. I believe that printed money used to buy bonds will eventually cause inflation. If it won’t cause inflation, then, using the logic of the New Monetarists, the government could simply eliminate taxes and borrow all the money it needs from bonds sold to the Fed.

That certainly would boost the economy in the short term. And, if all that printed money doesn’t cause inflation, you have created the perfect solution to any economy’s economic ills.

It would truly be money from heaven and it could basically move any economy in the world into hyper drive. I don’t believe that "Money From Heaven" really exists.

As I have said before, "Money From Heaven" is the path to Hell. It is amazing that such a line of economic thought is getting increasingly greater and more serious attention. It is also a reflection of the sad state of the economic profession that this line of thinking represents cutting edge non-mainstream economists.

I am a big believer that almost all real change in economic thought over the next few decades will come outside of the mainstream. That this represents non-mainstream thinking shows how far economics has yet to go.

That the economics profession has failed so miserably is a key part of the reason we are in the current economic mess and, more importantly, will be a key part of the reason we will have so much trouble getting out of this mess after the "Aftershock" hits.

Moving economics into a much more sensible direction is so important that I devoted a whole chapter to this issue in the second edition of "Aftershock" (chapter 9).

But, what’s important to the investor now is that this is only part of a larger movement among economists and financial analysts to support more government debt and more money printing.

Or, pumping up the government debt bubbles and dollar bubbles to save the stock, housing, private credit and consumer spending bubbles. This is EXACTLY how we predicted people would react in America’s Bubble Economy.

It is also the reason why I have said it will be very hard to avoid an Aftershock. The fear of letting our current bubbles pop is so great that we will work desperately hard to inflate two bigger bubbles (government debt and dollar bubbles) to save them temporarily.

The whole way we will ignore those two bubbles we are creating or say they aren't bubbles (like the New Monetarist Theory supporters).

Denying that the earlier bubbles are still bubbles and that the two new ones we are creating are bubbles will dominate financial and political discussion for several more years. Ignoring those issues will also be a key element of financial and political discussion in the next few years.

In reality, both the government debt and dollar bubbles are destined to explode with even greater fury than our earlier bubbles and of course, take what remains of those earlier bubbles down with them.

Growing talk of support for government borrowing and money printing is exactly what I would expect (that’s how they become really big bubbles in the first place) and, as I earlier discussed, it will have, and has had, a beneficial effect on the economy and the stock market.

And, as I predicted, it won’t be only the United States playing the money printing game. Europe, Britain, Japan, and China (the biggest money printer of all) will play this game as well. It’s the easy out for politicians and for a population who desperately wants to believe that it will keep the stock, housing, private credit, and consumer spending bubbles alive. It is, as we said in Aftershock, a World’s Bubble Economy.

There is little interest in solving these bubble problems. Just the opposite — there is intense interest in pumping them up more, as the Washington Post article clearly indicates.

In this situation, the only real solution is the wall. Yes, hitting the wall. No need for enlightened academic discussion or enlightened politicians. Hitting the wall is infinitely easier.

No tough political decisions or brilliant economic analysis is required by anyone. The financial markets and government finances simply melt down due to the consequences of our actions.

It certainly is painful, but it is effective. Once the economy has melted down and proves how wrong we were, we have the opportunity to rebuild the economy in a much more sensible way that is not at all dependent on bubbles for growth, but on higher productivity instead.

It’s very much like the Chicago fire. Although terrible, it cleared the way for a complete re-design of Chicago that created a much more livable, vibrant and beautiful city. Burning the economy down really will work, but it’s a painful choice.

The only reason to go that direction is that voters, and their politicians, find the alternative of changing early and giving up our bubbles, even more painful.

About the Author: Robert Wiedemer
Robert Wiedemer is a managing director of Absolute Investment Management, an investment-advisory firm for individuals with more than $200 million under management. He is a regular contributor to Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here to read more of his articles. Discover more about his latest book, "Aftershock," by Clicking Here Now.

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