Over the past several months I have noticed on a number of blogs promote a Quixotic theory — an underlying desire for some kind of economic Armageddon in which:
1) US financial system collapses
3) Gold owners become the new kings*
While I am certainly not a fan of the status quo, I just do not see much direct evidence to support the thesis that Apocalypse Now is just around the corner, if ever.
Other theories circulated by self-proclaimed financial contrarians are along the lines of:
1) Conspiring central bankers induce a global hyperinflationary storm
3) No more politicians or central planners — everyone uses gold and silver*
Again, not that I am for the status quo — I certainly would love freer markets, freer trade, no war, etc. — but simply wishing for it to happen and nirvana happening does not follow. It is a non sequitur. Furthermore, wishful thinking is also fallacy.
Or in other words, if simply wishing for something X to happen made something X to actually occur, then every ideological goal would be achieved, including the ones that contradict one another! Perhaps this desired apocalypse will take place sooner if it is blogged about more often!
Yet, in the event of another financial purge similar to 2008-2009, it is not like the central bankers and treasury policy makers in 200-some-odd countries are going to wake up the next day and resolve immediately to be “Austrian” or libertarian. In fact, since 2008 central banks and treasuries have arguably become more emboldened and lionized.
Thus, there is academically crafting an ideal market process and then there is reality by which government intervention is the rule not the exception. Those living within a reality distortion field are no better off financially than Y2K preppers, Millerites or doomsayers of yore (for more on apocaholic’s see also this excellent piece from Wired).
Labor inputs and productivity outputs
This also touches on my NBER post a couple weeks ago. I briefly mentioned it: the positive labor issues that have gone left unsaid, that despite a relatively low participation rate (the lowest in 30 years), the US is still producing the same and perhaps even more “economic activity” than ever before.
While this could be due to labor saving technologies and/or replacements (e.g., automated robots in the factory & warehouse), I think this is a very positive attribute that is overlooked in all of the election-year pandering.
For example, according to CNBC and Huffington, workforce participation is the lowest since 1981. Yet this loss in labor input has not resulted in a dramatic drop in productive output. As I mentioned in the post above, I think this has a lot to do with several factors: labor saving technologies, freer global trade, more countries producing on the open market, fewer ginormous wars, etc.
With that said, I also think that one of the reasons welfare projects like Social Security probably “won’t run out” is because of the continued growth in non-human productivity. And, in the event this robotic labor force does not fit the bill, I would argue that future US population pyramids (like this one) illustrate that unlike the rest of the world, the US will have enough Peter’s to subsidize elderly Paul’s. Again, these subsidies and government programs are not something I endorse, but rather the above statements are simply a reflection of reality, of what is actually taking place in meat space.
In contrast, by 2050 China’s population problems (see this moving pyramid) are thus: 30% of the population will be 60+ and only 48% of the population will be of working-age. In fact, BusinessSpectator recently published a well-written, in-depth exposition about the looming demographic challenges facing China.
Now of course as a libertarian this is not the kind of economic world that I laude or that I would applause, but I think this is an accurate description of the world as it is today and will be in the foreseeable future.
Credit deflation, not mass inflation
Short of handing out envelopes with bundles of cash, what can the Fed do, that it already has not that could possibly lead to an immediate Schiffian apocalypse? (Peter Schiff recently called QE3 the “final nail” in the USD coffin… yet he and many others like Gerald Celente, have used similar phrases for years; how many nails has Schiff used now?)
And assuming it can create an actual Schiffian apocalypse, how does this then lead to a world in which more exchanges are done via gold/commodity-based currency and a proverbial libertarian nirvana?
The problem with most of the libertarian movement and large portions of the Austrian school since 2008 has been their inability to admit that they are wrong about the Fed’s power today versus 70 years ago (I admitted I was wrong about China). Or how a transition towards “Austrian-friendly” policies would ever take place.
Some Austrians are worried about the money multiplier mechanism producing mass inflation. That the Fed increases its balance sheet by a trillion dollars, the banks lend this out 10 times over, producing $10 trillion in new money supply. Nothing of the sort, or anything remotely like it happened.
The Fed on the other hand is trying to spur lending by increasing the demand for loans. There are two problems going on:
1. Credit standards are way tighter now than in 2002-2006
2. The demand for loans is much lower
They are trying to fix two issues by lowering long term interest rates in the mortgage market to lower the cost of buying/owning — reflating the previous asset boom. This of course is not helping purge the malinvestment from the system, but it is also not creating a Misean crack-boom either.
Thus, if you’re willing to entertain for the moment that hyperinflation might not occur, I highly recommend a thorough explanation for “Why Credit Deflation is More Likely than Mass Inflation” — I think it arguably explains the financial phenomenon we have witnessed.
Furthermore, because of the numerous dollar-pegs and currency reserves, many other countries effectively import the Fed’s monetary policy. China and most of “emerging” East Asia strive to have “weak” currencies to help their exports, this is actually done to the detriment of their domestic economies (it makes it more expensive to import needed commodities to develop). Yet there are so many entrenched interests that benefit from this (e.g., large exporters in Guangdong and Zhejiang) that it will continue unabated. Thus through their myopic neo-mercantilistic policies they will continue to import US fiscal policy even during another financial purge or three.
Is there really a time limit to the mixed economy that is the US?
It is impossible to predict because the market can produce things that were never imagined in the past. The market giveth, the state taketh away. Which force is dominant is empirical. Unfortunately, many apocaholic libertarians are entirely too confident in their predictions of imminent doom. Yet refuse to acknowledge that they may indeed be wrong.
One final note: regarding perpetual European bailouts, for some backstory I recommend Philipp Bagus, The Tragedy of the Euro (pdf). As loathsome and perverse as this situation is, this is just one more reason to move back to the US — residents of the US benefit greatly from this predicament.
[* both of these theories line of reasoning is similar to the Underpant Gnomes in South Park as well as the encryption realists from XKCD. Also, many thanks to Vijay Boyapati, James Miller, Wirkman Virkkala, and Anthony Gregory for their comments and suggestions.]