“Little more than a decade after consumers binged on inexpensive mortgages that helped bring on a global financial crisis, a new debt surge — this time by major corporations — threatens to unleash fresh turmoil.
The root cause of the debt boom is the decision by the Federal Reserve and other key central banks to cut interest rates to zero in the wake of the financial crisis and to hold them at historic lows for years.“
And now for the meaty post of the week! Seriously, this is a fantastic piece by The Grump Economist, John H. Cochrane, senior fellow at The Hoover Institute.
Here’s a sneak preview:
What’s causing the big drop in the stock market, and the bout of enormous volatility we’re seeing at the end of the year?
The biggest worry is that this is The Beginning of The End — a recession is on its way, with a consequent big stock market rout. Is this early 2008 all over again, a signal of the big drop to come?
Maybe. But maybe not. Maybe it’s 2010, 2011, 2016, or the greatest of all, 1987. “The stock market forecast 9 of the last 5 recessions,” Paul Samuelson once said, and rightly. The stock market does fall in recessions, but it also corrects occasionally during expansions. Each of these drops was accompanied by similar bouts of volatility. Each is likely a period in which people worried about a recession or crash to come, but in the end it did not come.
Still, is this at last the time? A few guideposts are handy.
I don’t like deficit and debt, to be sure, but government borrowing should be seen as the symptom. The real problem is excessive government spending.
This is one of the reasons I’m not a fan of a balanced budget amendment, Based on the experiences of American states and European countries, I fear politicians in Washington would use any deficit-limiting requirement as an excuse to raise taxes.
I much prefer spending caps, such as those found in Hong Kong, Switzerland, and Colorado. If you cure the disease of excessive government, you automatically ameliorate the symptom of too much borrowing.
That being said, the fiscal chaos plaguing European welfare states is proof that there is a point when a spending problem can also become a debt problem. Simply stated, the people and institutions that buy government bonds at some point will decide that they no longer trust a government’s ability to repay because the public sector is too big and the economy is too weak.
Krugman’s way of thinking could apply equally well to acts of crime. Suppose I steal $10,000 from you. My wealth goes up. Your wealth goes down. But the wealth of society as a whole hasn’t changed at all. Right? Wrong.
Remember the original Jamestown colony? In 1607, it started out as an experiment in socialism. “We” really did own everything collectively and “we” nearly starved to death. But then a new governor substituted “mine” and “thine” for “we” and the colony began to prosper. Who owns what and why and the ability to be secure in what we own is hugely important for growth and prosperity.
Through the years, Bernard Madoff, the convicted ponzi schemer who defrauded his investors, “generously” donated millions of dollars to charity — cancer research, hospitals, theaters, schools, and more. At least one of these charitable organizations invested with Mr. Madoff, where the invested funds disappeared.But Madoff is not the only one who gives money to people after first taking it from them. Today’s political leaders win votes and plaudits by giving goodies to little Johnny, but they don’t bother to tell little Johnny that they’re putting it all on his credit card.
Paul Krugman is apparently so entranced by the magic that he believes that forcing firms to replace capital, even if it makes them poorer, “can stimulate spending and raise employment” and “the broken windows fallacy ceases to be a fallacy.” In this alternate universe, hurricanes Katrina and Sandy could do more for U.S. economic growth than the development of the petroleum industry, the refinement of the internal combustion engine, the development of the electric power industry, or the development and use of the semiconductor transistor.
Professor Cochrane writes that macroeconomists looking at new ways to explain the slow growth disaster are considering the uncertainty introduced by arbitrary policy changes, large distorting taxes, intrusive regulations, and the “unintended disincentives of social programs.”If these new approaches are correct, and one’s goal is to inflict maximum economic damage on Americans, ObamaCare is a smashing success. It affects the whole population, generates huge uncertainty from arbitrary policy changes, imposes large distorting taxes, generates exponentially expanding intrusive regulations, and has already resulted in a veritable mother lode of unintended disincentives to work, employ people, provide medical care, start new businesses, and continue to operate existing ones.
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